The recent 1.5% interest rate cut by the Bank of England may have been welcomed as a boost to the economy by UK PLC, but what about the poor, beleaguered consumer? Whilst the newspapers were filled with the good news from the City and shares perked up, the consumer was left wondering if the base rate cut would filter down to ground level and offer some relief to those paying interest on the 72 million credit cards currently in circulation.
While mortgage borrowers will have to wait and see if the trickle-down effect reduces the cost of their mortgage repayments, credit card customers have been warned not to expect repayments to fall. Consumers look set to continue to pay an average of 17% APR on credit cards, and that percentage is unlikely to change as a result of the rate cut. The common opinion is that rates are only cut to attract customers, and in the current economic climate, lenders are reluctant to encourage even more credit into the system. Even though the lenders would like to pass on these savings to their customers, in the current economic climate those savings may have to wait a while until the market is more stable.
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.
Store cards are some of the worst offenders, cashing in on customer loyalty and a high street that relies on continuous spending. The average credit card APR rate has risen from 16.8% in 2007 to 17.6% today, despite the interest rate almost halving from 5.75% to 3% during the same time. Store card rates have risen more sharply, up by 1% over a six-month period. The most expensive store cards now charge an average of 30%. Government officials have been angered by the reluctance shown by card lenders to reciprocate the base rate cuts, accusing the credit card companies of behaving "irresponsibly" despite the mounting pressure from the Government and the public to mirror the base rate cuts with cuts of their own APR levels. Credit card lenders, however, remain steadfast in their refusal to adjust interest charges, knowing that to do so could damage the market far more than 'instant fixes' such as rate cuts.
The credit card lenders, concerned by 'bad debt' exposure, are tightening their policies on repayments, and enforcing stricter approval guidelines for first-time card applicants. Minimum monthly repayments, as any cardholder knows, barely cover the cost of administration or interest charges. The Citizen's Advice Bureau has seen more new debt inquiries in 2007-08, with 20% of its clients expressing concerns over credit card, store card and charge card debts. The Consumer Credit Counselling Service reports a surge in 'charging orders' being enforced by lenders, potentially putting customers in even more financial difficulty as a result of missed payments. The truth is that reducing the APR on credit deals to reflect the fluctuating base rate could compound matters, forcing lenders into ever-tighter controls over lending to keep their exposure to bad debt to a minimum. That wouldn't help the consumer at all. Nor would it help to stabilise the market.
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.
While mortgage borrowers will have to wait and see if the trickle-down effect reduces the cost of their mortgage repayments, credit card customers have been warned not to expect repayments to fall. Consumers look set to continue to pay an average of 17% APR on credit cards, and that percentage is unlikely to change as a result of the rate cut. The common opinion is that rates are only cut to attract customers, and in the current economic climate, lenders are reluctant to encourage even more credit into the system. Even though the lenders would like to pass on these savings to their customers, in the current economic climate those savings may have to wait a while until the market is more stable.
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.
Store cards are some of the worst offenders, cashing in on customer loyalty and a high street that relies on continuous spending. The average credit card APR rate has risen from 16.8% in 2007 to 17.6% today, despite the interest rate almost halving from 5.75% to 3% during the same time. Store card rates have risen more sharply, up by 1% over a six-month period. The most expensive store cards now charge an average of 30%. Government officials have been angered by the reluctance shown by card lenders to reciprocate the base rate cuts, accusing the credit card companies of behaving "irresponsibly" despite the mounting pressure from the Government and the public to mirror the base rate cuts with cuts of their own APR levels. Credit card lenders, however, remain steadfast in their refusal to adjust interest charges, knowing that to do so could damage the market far more than 'instant fixes' such as rate cuts.
The credit card lenders, concerned by 'bad debt' exposure, are tightening their policies on repayments, and enforcing stricter approval guidelines for first-time card applicants. Minimum monthly repayments, as any cardholder knows, barely cover the cost of administration or interest charges. The Citizen's Advice Bureau has seen more new debt inquiries in 2007-08, with 20% of its clients expressing concerns over credit card, store card and charge card debts. The Consumer Credit Counselling Service reports a surge in 'charging orders' being enforced by lenders, potentially putting customers in even more financial difficulty as a result of missed payments. The truth is that reducing the APR on credit deals to reflect the fluctuating base rate could compound matters, forcing lenders into ever-tighter controls over lending to keep their exposure to bad debt to a minimum. That wouldn't help the consumer at all. Nor would it help to stabilise the market.
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 writes articles about credit and money saving for websites. Learn more about cheap credit cards and compare credit cards here.
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