Clare Francis: The credit card market has changed subtly but significantly because of the credit crunch. There are still some very good interest free deals available, but they’re only available to those with the best credit ratings. So consumers who have got less than perfect credit scores are finding it increasingly difficult to be accepted for new credit cards.
So is this situation likely to continue and could it get even worse? Well, Peter Harrison, who is a credit card expert here at moneysupermarket.com, is with me just to discuss what lies ahead really this year in 2009.
Q1: So Peter can you just explain a little bit about what’s happening in the market, because the credit crunch we all know is making it harder for people to borrow so how’s this panning out with the credit card market?
Peter Harrison: There’s no doubt that credit cards have become more difficult to obtain in line with other lending products, such as mortgages and loans. This is due to a number of factors including the ongoing shortage of funds as banks remain unwilling to lend to each other, because they won’t receive the money back. Another reason is increasing unemployment – people are struggling to get by.
Q2: So there’s more bad debts or people missing payments?
PH: Exactly that, and providers are becoming more stringent on who they actually want to lend to.
Q3: The other thing is that although providers have become more picky and more choosy about who they’re going to lend to, we’ve all seen the interest rates charged on a lot of credit card deals go up, even though the Bank of England has been slashing the countries official rate of interest. How are they able to get away with that?
PH: Unfortunately the Bank of England interest rate has very little to do with the interest rates governed on credit card companies, and that’s partly down to, as I said, the lack of funds currently. Credit card providers do raise funds in terms of the LIBOR rate – which is the London Inter-Bank Offer Rate –
CF: And that’s the cost of money, the cost of one bank borrowing from another?
PH: – That’s exactly that, and because of the unwillingness to lend to each other, the LIBOR rate has exceeded the Bank of England interest rate at about 1%, where beforehand it was between 0.1% and 0.2% above the base rate.
Q4: But standard rates of interest on credit cards are even higher than that, we’re looking at average rates probably nearer 20% now aren’t they, which is significantly higher than the base rate. The government is putting pressure on card companies, because an increasing number of people are struggling to meet payments, to cut these rates and last month we saw the card providers agree to a sort of code of conduct. Can you just explain a bit about what they’ve agreed to do with regard to pricing?
PH: Yes. With credit card companies are currently being more stringent who they want to lend to, they’re conducting regular reviews of the credit risk of that customer. You could increase your riskiness of a customer if you regularly exceed your credit limit, you only pay the minimum payment on your credit card, or if you have not been able to pay another loan or credit card, which as a result to offset that risk, they are likely to increase your interest rate –
Q5: So that type of customers more likely to see their rate go up?
PH: Yes and what the government has tried to do is say ‘it’s not really that fair that interest rates are increased suddenly’. So the government has introduced, or worked with credit card companies to bring in this code of conduct. Part of it - the main element of this new code of conduct - is that a credit card company must give a customer 30 days written notification on what their likely increase in interest rates will be.
The 30 days will give you time if you want to apply for a new credit card or alternatively make arrangements to pay off that outstanding debt.
Q6: Because it seems a bit self-defeating in a lot of ways if the people that are most likely to see their rate increase are those that are evidently having problems, because they can’t afford to pay more than the minimum or their missing payments, or going over their limit, but by increasing the rate that they’re being charged it’s going to make it even more likely that they’re going to default or whatever, so it just seems a bit of an odd strategy for the credit card companies to be using if they are seeing more and more people missing payments. Is there any protection in this code of conduct for people that are in difficulty?
PH: There is actually.You will be given a reasonable amount of time to pay off your outstanding debt if you seek guidance from the credit card company or a debt advice charity.
CF: So that’s if you phone somebody and say I’m having problems?
PH: Exactly that, and if you’re making plans to ensure that you’re paying off that outstanding debt, then some arrangements can be made. I suppose it is the ‘reasonable time’ and what that is defined as is at the discretion of the credit card company.
Q7: So it sounds as though the new code of conduct is good news for the consumer but could there be any sort of negative knock-on impact because of it if providers are limited in the extent to which they can now increase standard rates of interest?
PH: Unfortunately it does mean that. Credit card providers are being hit in terms of their profit margins, and there are some other regulations coming in recent times including a key area which is profitable, which is including payment protection insurance. What we may see is an increase in the number of charges being introduced, things like when you use your card abroad, using your credit card at an ATM withdrawal point, or making a balance transfer. There will be increases in charges.
Q8: So people, So you’ve got to be vigilant and watch out for increasing fees and charges in other ways?
PH: yes, it’s something we should be aware of.
Q9: Is the market going to get less competitive because if credit card firms are still struggling to raise money and get money to lend to people, are we going to see a reduction in the number of interest-free deals available or the length of time you can benefit from an interest-free period?
PH: We’ve already seen in recent times less introductory deals in the market – certain providers have removed them from the market, others have lessened their duration. We’ve also seen an increase in fees as well so there is no doubt that if unfortunately there are less competitive deals out there compared to the summer of last year.
Q10: So what do you think lies ahead for 2009? I’m just thinking of people who have been reliant on [credit], and they’ve just assumed that if they apply for a new card they’ll get it and can move debts from one card to another, or get a new card for a 0% offer on purchases for their summer holiday or something like that. Are those options going to still be available or do you think 2009 is going to be the year where it really sort of contracts and we just have to get used to using credit card in perhaps a slightly different way?
PH: I think we’ve always been reliant on credit cards to allow lending, unfortunately as I said credit cards are becoming more difficult to obtain, therefore I would actually ask that you actually look to pay off that outstanding debt, and maybe now is the time to stop switching from maybe a 0% card or paying high-interest rate, and really focus on what you need to purchase.
CF: And clearing any debts that you’ve already got?
PH: Of course.
CF: Thank you Peter, thanks.