Credit Cards Strike Back!
|
According to a new report, Precious Plastic 2006 from PricewaterhouseCoopers (PwC), credit-card issuers are set to reintroduce annual fees on credit cards.
As the moment, only a tiny percentage of cards charge an annual fee, typically around the £10 to £20 mark. However, lenders are looking for ways to boost their profits, in order to offset rising bad debts and falling profits. One particular group of card users is under fire: so-called "rate tarts", who avoid paying interest on their debts by surfing them from one introductory 0% deal to another.
In its report last year, PwC warned that these 0% balance transfer deals were costing card issuers around a billion pounds a year. However, during 2005, many lenders introduced balance-transfers fees (typically 2% of transfer values) to help offset the cost of providing extended periods of interest-free credit. Hence, PwC now reckons that 0% rate tarts are costing card issuers around £600 million a year in lost revenue.
Bad debts are also giving card issuers a headache: PwC's research shows that a typical person entering into an Individual Voluntary Arrangement (a type of personal insolvency) owes an average of £60,000 in non-mortgage debt to eleven different credit cards. With total consumer credit (non-mortgage debt) currently at a record high of £191 billion, a typical household has almost £7,700 of unsecured debt. PricewaterhouseCoopers expects this total to grow to £200 billion by June of next year. Yikes!
Of particular interest is the fact that three-quarters (75%) of borrowers in difficulty admitted to PwC that their problem was caused by overspending, rather than unexpected events, such as sickness, unemployment or separation. PwC's report also revealed this frightening fact: one in sixteen Brits now has non-mortgage debts worth more than their entire gross salary (before deductions). Ouch!
It's clear that, at least for the immediate future, credit-card firms will face increasing pressure on their profit margins, particularly as the demand for credit starts to slow. What's more, some of the industry's shady practices are facing scrutiny from competition watchdogs.
For example, payment protection insurance has been criticised by the Financial Services Authority and may face an investigation by the Office of Fair Trading (OFT). Also, sky-high penalties for minor slip-ups have been criticised by the OFT In addition, both store cards and their insurance policies have been attacked by the Competition Commission. These are not happy times for the providers of plastic!
Thus, PwC predicts that, in order to compensate for falling revenues, many issuers will fall back on an old favourite: the annual fee. However, there is fierce competition between card issuers for business, so the first major issuer to go down this route could face an exodus of customers. For example, MBNA recently began charging some of its customers a £25 annual fee, which led to a flood of accounts being closed.
Still, if the OFT does take action to curb excessive profits in these areas, wily card issuers will simply come up with other ways to maintain their profitability. I worked in financial marketing for over ten years and used to call this the "bubble under the lino" effect - if you push down on in one area, the bubble pops up somewhere else! Thus, it pays to read those boring statement inserts which arrive with your card, as they usually warn of bad news and extra charges!
Finally, if you're unhappy with the interest rates and fees that your card charges (or you're not satisfied with your issuer's service), the simple answer is to vote with your feet. Read my latest article on the 0% game and start looking for a better deal today!
More: You'll find your perfect plastic in our new improved Credit Card centre!
Skip Navigation