Anyone who thought the credit crunch was old news was given a stark reminder that its ramifications are still being felt after Egg, the internet bank owned by US banking giant Citigroup, revealed it had written to 161,000 credit card customers informing them that their accounts will close next month.
Unfortunately, this is just the latest sign that financial institutions are clamping down on borrowing.
Citibank will be looking to cut costs having recently announced that it had posted losses of nearly $10billion (£5billion) in the last three months of 2007, and had been forced to write down $18.1billion in bad mortgage debts.
Egg said it is reducing the risk profile of its credit card book and that it is only closing the accounts of those with poor credit scores. However, customer feedback has suggested that those with the best credit ratings, who clear their balances in full each month, are also being targeted - perhaps because they are not profitable enough. This is a claim Egg has strongly refuted, stating that customers affected had a 'higher than acceptable' risk profile.
In recent years, banks have been happy to increase the amount they are willing to lend to customers with excellent credit records, while reducing limits for struggling borrowers.
The credit crunch and impact of the American sub-prime mortgage crisis has been a sharp wake-up to financial institutions - many are now looking to reduce their debt exposure and widen their profit margins, so even low-risk customers are being affected.
The current financial crisis is not the only thing affecting the credit card industry. Over the last few years, over indebtedness has resulted in many firms reporting an increase in the number of people defaulting on their repayments. Providers have also been forced to cap the fees they charge if a customer exceeds their credit limit or is late making a payment at £12 and they are now facing consumer backlash against payment protection insurance, which is a big revenue spinner. All of these factors have had an impact on margins.
The pressures are taking their toll and Egg is not the only provider to be clamping down on customers. Lenders such as Barclaycard and HSBC have said they are reducing credit limits in some cases and rejecting a higher proportion of applications. Others, including Lloyds TSB, have introduced annual fees for customers who do not use their cards very often.
So what action can you take if you're in the market for a credit card?
Perhaps the most important factor is only to apply for cards you're likely to be accepted for. Every application for credit is logged on your credit file - if you are turned down it will have a negative impact on your credit score. This makes shopping around with our Smart Search tool more important than ever - it will return credit cards based on an estimation of your credit score, without leaving a footprint on your credit profile.
And if you have cards in your wallet that you no longer use, cancel them. Rather than just focusing on outstanding debts, lenders are also now looking at the total debt available to you.
The good news is that there are still plenty of good credit card offers out there for different groups of people - click on the links below to find out more:
For those who want to move their balance but think they have a good credit rating:
- Virgin Credit Card - 0% for 15 months on balance transfers (typical APR 15.9%; 2.98% handling fee) and 0% on purchases for three months.
- Barclaycard Platinum - 0% for 14 months on balance transfers (typical APR 14.9%; 2.90% handling fee) and 0% on purchases for three months.
For those who will pay off their balance in full each month:
For those who want to spend with a less than perfect credit rating:
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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