The current economic slowdown that is battering the financial world is a little different from previous 'market readjustments'. This time it's not just big business and the banking industry that have felt the shock-waves - the crunch has hit consumers much earlier than before. This is partly due to the amount of personal debt that individuals have built up during the good times, when credit was easy to obtain and the banks were willing to lend to everyone who came knocking at their door. A survey by Moneyfacts, the financial information analysts, found that at least 10% of credit cards have raised their interest rates or imposed fees as a direct result of the financial storm now sweeping across UK PLC.
A knock-on effect of the credit crunch has been the average interest rate on credit cards rising from 16.8% to 17.2% since the start of August 2008. This trend upwards is in direct opposition to the Bank of England's policy of cutting base interest rates to stave off the chances of runaway inflation. The credit crunch is biting, and biting hard. As banks and lenders realise that the money pot in the City is nearly empty, they know that this time consumers are feeling the squeeze as well. In the lenders' eyes that means a greater risk of customers defaulting on payments, so the interest rate rise on credit cards is seen as a financial cushion against defaults and bad debt. The lenders are shoring up their financial positions and doing their utmost to reduce their exposure to bad debt.
As the dominoes started to fall in the banking industry, lenders lost faith with their former partners and in their customers' ability to pay back loans and credit card debts. The system relies on continuous injections of consumer cash in the form of interest payments to keep working. As borrowing from other financial institutions has become much harder, the only way for lenders to raise capital is to increase the interest charges on credit cards, loans, credit agreements and mortgages. This ground-shift signifies an end to the 'live now, pay later' mentality of the 1980's and 1990's. The good times really could be over - for a short time, anyway. But by readjusting their positions, the lenders may actually be doing the right thing, and not giving in to 'quick fix' solutions like rate cuts. A more pragmatic approach to the system means that credit cards still offer great deals - they're just a little more careful to avoid lending to customers that may already have problems.
Up until 2007 the previous ten years were a boom time for credit card lenders in the UK. It wasn't just the credit crunch that stopped the credit card companies in their tracks. An extremely competitive credit marketplace, coupled with a global economic slowdown, increasing international bad debts and government regulations made the credit card lenders re-evaluate their positions. Some more panic-stricken credit card companies responded by 'dumping' thousands of customers they considered not 'profitable' - namely those who paid off their credit card balance in full every month. Other lenders are reigning in their customer's spending habits by restricting credit limits and access to cash withdrawals.
The credit card industry has suffered a double-whammy. The loss of overall market share in the late 1990's resulted in a scramble by lenders for customers, enticing in consumers with 0% balance transfer offers and cashback schemes. That has all now changed, with most cards imposing up to 3% balance transfer fees in an attempt to regain lost profits as a result of the 0% offers. The second blow was the decision in 2006 by the Office of Fair Trading to impose a 12 cap on penalty charges. Now lenders are bracing themselves for another knock-back as the Complaint's Commission takes a close look at personal protection insurance schemes imposed by lenders on many credit card deals.
The economic slowdown could have yet another sting in its tail, with unemployment now under the spotlight. Higher interest rates on cards for everyone is the lender's way of buffering their position, minimising their financial exposure. It means that everyone pays the price through increased interest charges, but a more stable credit card market emerges as a result. Credit card lenders are keeping a close eye on their customers, looking for early signs of financial difficulty. They are well aware that things are tight for everyone, and by keeping a watch for customers who show signs of struggling, they can step in early and guide the customer through the financial rapids they may find themselves in. The credit crunch does mean a slowdown generally, but rather than a complete collapse of the house of cards, it's more a matter of shoring up the foundations so that the market can emerge stronger after the event.
A knock-on effect of the credit crunch has been the average interest rate on credit cards rising from 16.8% to 17.2% since the start of August 2008. This trend upwards is in direct opposition to the Bank of England's policy of cutting base interest rates to stave off the chances of runaway inflation. The credit crunch is biting, and biting hard. As banks and lenders realise that the money pot in the City is nearly empty, they know that this time consumers are feeling the squeeze as well. In the lenders' eyes that means a greater risk of customers defaulting on payments, so the interest rate rise on credit cards is seen as a financial cushion against defaults and bad debt. The lenders are shoring up their financial positions and doing their utmost to reduce their exposure to bad debt.
As the dominoes started to fall in the banking industry, lenders lost faith with their former partners and in their customers' ability to pay back loans and credit card debts. The system relies on continuous injections of consumer cash in the form of interest payments to keep working. As borrowing from other financial institutions has become much harder, the only way for lenders to raise capital is to increase the interest charges on credit cards, loans, credit agreements and mortgages. This ground-shift signifies an end to the 'live now, pay later' mentality of the 1980's and 1990's. The good times really could be over - for a short time, anyway. But by readjusting their positions, the lenders may actually be doing the right thing, and not giving in to 'quick fix' solutions like rate cuts. A more pragmatic approach to the system means that credit cards still offer great deals - they're just a little more careful to avoid lending to customers that may already have problems.
Up until 2007 the previous ten years were a boom time for credit card lenders in the UK. It wasn't just the credit crunch that stopped the credit card companies in their tracks. An extremely competitive credit marketplace, coupled with a global economic slowdown, increasing international bad debts and government regulations made the credit card lenders re-evaluate their positions. Some more panic-stricken credit card companies responded by 'dumping' thousands of customers they considered not 'profitable' - namely those who paid off their credit card balance in full every month. Other lenders are reigning in their customer's spending habits by restricting credit limits and access to cash withdrawals.
The credit card industry has suffered a double-whammy. The loss of overall market share in the late 1990's resulted in a scramble by lenders for customers, enticing in consumers with 0% balance transfer offers and cashback schemes. That has all now changed, with most cards imposing up to 3% balance transfer fees in an attempt to regain lost profits as a result of the 0% offers. The second blow was the decision in 2006 by the Office of Fair Trading to impose a 12 cap on penalty charges. Now lenders are bracing themselves for another knock-back as the Complaint's Commission takes a close look at personal protection insurance schemes imposed by lenders on many credit card deals.
The economic slowdown could have yet another sting in its tail, with unemployment now under the spotlight. Higher interest rates on cards for everyone is the lender's way of buffering their position, minimising their financial exposure. It means that everyone pays the price through increased interest charges, but a more stable credit card market emerges as a result. Credit card lenders are keeping a close eye on their customers, looking for early signs of financial difficulty. They are well aware that things are tight for everyone, and by keeping a watch for customers who show signs of struggling, they can step in early and guide the customer through the financial rapids they may find themselves in. The credit crunch does mean a slowdown generally, but rather than a complete collapse of the house of cards, it's more a matter of shoring up the foundations so that the market can emerge stronger after the event.
About the Author:
Mark Wright writes regularly on the topic of the recent financial crisis, and educates readers on what to expect regarding the credit crunch. Read more about credit cards here.
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