Problem customers ‘will face credit card rate rises’
20 November 2006
Credit card customers who persistently pay late or go over their limit could face increases in their interest rate charges as companies react to the regulatory squeeze on the industry, the leading financial services research company Defaqto warns. And it also believes annual fees for credit cards are likely to be imposed.
The new tough tactics from credit card companies come in the wake of the Office of Fair Trading forcing firms to cut so-called “delinquent charges” to a capped £12. This is hitting corporate profits and obliging credit card providers to look at alternative techniques to protect their margins, such as higher interest rates for particular customers.
Card firms are also facing further regulatory action over costly Payment Protection Insurance. Defaqto estimates that the cost to consumers wanting to receive £100 of monthly credit card protection varies from £5 to a massive £28.33. And interchange fees charged on credit card transactions are also being looked at by the European Commission.
Defaqto’s report “Credit Cards in the UK – Protecting Margins” reveals that Co-Operative Bank has already introduced a £2 a month charge for its Platinum Base Rate Tracker card. Report author David Black, Defaqto’s Head of Banking, says: “Annual fees will more likely be introduced for people who pay off their balance every month rather than for those who carry debts. Those who have debts on their cards are more easily targeted by an increase in interest rates.”
He points to the US experience where it is “fairly common” for credit card providers to increase interest rates charged for customers who default.
“Some providers will impose a rate increase after one default while others delay such an imposition until the customer’s defaults become more chronic. Given the £12 cap on charges, Defaqto expects some providers to choose this approach with some of their future credit card offerings,” he adds.
The report adds that credit card firms are proposing to share more information on credit card customers. This has been preceded by an increase in balance transfer fees for people moving cards and also a reduction in the zero per cent offers for balances of more than £1,000.
Currently only Britannia Building Society, Sainsbury’s Bank, Ulster Bank, Norwich and Peterborough Building Society and Stroud and Swindon Building Society do not impose balance transfer fees.
Defaqto believes providers will withdraw from the market over the next few years. For instance Cahoot’s credit card was closed to new customers at the end of September. However it has not ruled re-entering the market and is still servicing existing customers.
