The Bank of England may have given UK PLC an economic boost with its recent interest rate cut of 1.5%, but the credit crunch isn't just affecting big business and the banking sector. The average person in the street is feeling the squeeze too. So will the reduction of the base rate to 3% offer any short-term relief to the customers holding a total of 72 million credit cards, beleaguered by interest charges far and above the base rate?
Homeowners looked forward to the interest rate cut, knowing that lenders would trickle down the base rate cuts to mortgage payers, reducing their monthly repayments. But credit card customers have been warned from the start that the same may not apply to them. Credit card lenders tend to reduce the APR to entice new customers in, offering deals that include 0% interest for fixed terms to encourage people to take up their cards. The mere fact that the Bank of England decided to cut the base rate has had no impact on their decision to continue to charge an average of just over 17% APR on credit cards. Lenders are concerned about the possibility of exposure to bad debt, so whilst 0% deals are still available and there are plenty of incentives for new customers to be found, the criteria set by the lenders may be stricter than before.
The potential for 'bad debt' to eat into the profits of the credit card lenders is giving the credit card companies pause for thought. They already know that some current cardholders are increasingly having problems managing their debts, and as they struggle to make repayments it could potentially eat into the credit card company's profits. The profit is directly linked to the amount of interest charged, so any reduction would leave the credit card companies exposed to reduced profits. As a result, they're fighting hard to make sure their businesses are not squeezed by reducing interest rates too early, despite Government attempts to inject new life into the economy at street level. The Prime Minister and Chancellor have seen this reluctance to reduce rates by lenders as detrimental, encouraging Whitehall to call for a "new, responsible approach" to lending. The credit card companies disagree, saying that knee-jerk solutions will not improve the overall economic picture, but could, in fact, make it worse. They believe that maintaining the status quo in this climate is the most pragmatic approach.
Some of the worst offenders are store cards, although the average credit card APR rate has risen to 17.6% today compared to 16.8% a year ago. Store card rates have risen sharply - up 1% in just six months - with some of the most expensive store cards now charging customers an APR of 30%. This is despite the base rate almost halving in the same time frame; from 5.75% in 2007 to 3% today. Government officials have been angered by the apparent intransigence of card lenders to reduce their rates, accusing them of behaving "irresponsibly". In return, credit card lenders remain steadfast in their more pragmatic 'wait and see' attitude, claiming sweeping reductions in the card APR rates could actually make matters worse for the financial sector as a whole, and consequently for consumers as well.
The credit card lenders, concerned by the potential of exposure to 'bad debt', are tightening up on their approach to business, making sure that customers take full responsibility for their loans. It can take only a couple of missed payments for a customer to be at the receiving end of strict enforcement of payment orders, but card companies do understand that everyone is being hit by this crisis, and will do everything they can to help people out. This isn't some good-natured, altruistic approach - it's good business sense. Minimum monthly repayments barely cover interest charges and administration fees. The Citizen's Advice Bureau has said that 20% of all new debt inquiries in 2007-08 have concerned credit card, store card and charge card debts. The Consumer Credit Counselling Service agrees; they have seen a surge in 'charging orders' enforced by card firms in the same period. Card lenders in return have made changes to their customer support policies, being much more proactive in helping those who do get into difficulties tackle the problems much earlier, reducing the overall burden.
In the US, interest rates on credit cards have echoed base rate cuts, but this is unlikely to happen in the UK any time soon, despite only a 2% difference in the base rate between the two countries. Lenders point to regulations, such as the decision by the Office of Fair Trading in 2006 to cap penalty fees to 12 as responsible for their woes. They also earmark their own falling profits on payment protection insurance as a primary factor in their inability to reduce card interest rates. The card lenders are trying to maintain a critical balance at the most direct contact point that most consumers have with the financial world, and despite the nay-sayers, there are still very attractive deals to be had on credit cards, if you're prepared to do your homework.
Homeowners looked forward to the interest rate cut, knowing that lenders would trickle down the base rate cuts to mortgage payers, reducing their monthly repayments. But credit card customers have been warned from the start that the same may not apply to them. Credit card lenders tend to reduce the APR to entice new customers in, offering deals that include 0% interest for fixed terms to encourage people to take up their cards. The mere fact that the Bank of England decided to cut the base rate has had no impact on their decision to continue to charge an average of just over 17% APR on credit cards. Lenders are concerned about the possibility of exposure to bad debt, so whilst 0% deals are still available and there are plenty of incentives for new customers to be found, the criteria set by the lenders may be stricter than before.
The potential for 'bad debt' to eat into the profits of the credit card lenders is giving the credit card companies pause for thought. They already know that some current cardholders are increasingly having problems managing their debts, and as they struggle to make repayments it could potentially eat into the credit card company's profits. The profit is directly linked to the amount of interest charged, so any reduction would leave the credit card companies exposed to reduced profits. As a result, they're fighting hard to make sure their businesses are not squeezed by reducing interest rates too early, despite Government attempts to inject new life into the economy at street level. The Prime Minister and Chancellor have seen this reluctance to reduce rates by lenders as detrimental, encouraging Whitehall to call for a "new, responsible approach" to lending. The credit card companies disagree, saying that knee-jerk solutions will not improve the overall economic picture, but could, in fact, make it worse. They believe that maintaining the status quo in this climate is the most pragmatic approach.
Some of the worst offenders are store cards, although the average credit card APR rate has risen to 17.6% today compared to 16.8% a year ago. Store card rates have risen sharply - up 1% in just six months - with some of the most expensive store cards now charging customers an APR of 30%. This is despite the base rate almost halving in the same time frame; from 5.75% in 2007 to 3% today. Government officials have been angered by the apparent intransigence of card lenders to reduce their rates, accusing them of behaving "irresponsibly". In return, credit card lenders remain steadfast in their more pragmatic 'wait and see' attitude, claiming sweeping reductions in the card APR rates could actually make matters worse for the financial sector as a whole, and consequently for consumers as well.
The credit card lenders, concerned by the potential of exposure to 'bad debt', are tightening up on their approach to business, making sure that customers take full responsibility for their loans. It can take only a couple of missed payments for a customer to be at the receiving end of strict enforcement of payment orders, but card companies do understand that everyone is being hit by this crisis, and will do everything they can to help people out. This isn't some good-natured, altruistic approach - it's good business sense. Minimum monthly repayments barely cover interest charges and administration fees. The Citizen's Advice Bureau has said that 20% of all new debt inquiries in 2007-08 have concerned credit card, store card and charge card debts. The Consumer Credit Counselling Service agrees; they have seen a surge in 'charging orders' enforced by card firms in the same period. Card lenders in return have made changes to their customer support policies, being much more proactive in helping those who do get into difficulties tackle the problems much earlier, reducing the overall burden.
In the US, interest rates on credit cards have echoed base rate cuts, but this is unlikely to happen in the UK any time soon, despite only a 2% difference in the base rate between the two countries. Lenders point to regulations, such as the decision by the Office of Fair Trading in 2006 to cap penalty fees to 12 as responsible for their woes. They also earmark their own falling profits on payment protection insurance as a primary factor in their inability to reduce card interest rates. The card lenders are trying to maintain a critical balance at the most direct contact point that most consumers have with the financial world, and despite the nay-sayers, there are still very attractive deals to be had on credit cards, if you're prepared to do your homework.
About the Author:
Frank Armstrong specialises in financial and money related articles for websites. Learn more about cheap credit cards and compare credit cards here.
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