Credit crunch about to bite

Credit card customers have been bombarded with a glut of changes to fees and charges over the past few years. Although they appear to be very small tweaks to the terms and conditions which cost individual customers a few pounds, collectively they add up to an extremely lucrative source of income for credit card providers.

uSwitch.com’s latest credit card market analysis shows that this year, consumers will fork out a staggering £459 million in balance transfer fees alone. It also shows that people who have withdrawn cash on their credit cards have lined providers’ pockets with a staggering £71 million more this year than they did in 2001, almost £6 million more per month. Many of these changes, or ‘stealth charges’, are so discreet that consumers may not even be aware that they have happened.

With over two million credit card customers planning to hunt down the next best balance transfer deal in January, now is the time for consumers to brave the maze and put the terms and conditions under the microscope.

The story so far...

The introduction of the first balance transfer fee took place around three years ago and marked the beginning of the credit card industry’s efforts to recover the £600 million in lost revenue caused by 0% deals. Inevitably, card providers continued to cast their net wider and profit further from this type of credit card customer. Ultimately, this has led to: the increase of balance transfer fees and removal of caps; a reduction in the number of credit cards offering equal 0% introductory deals on both balance transfers and new purchases; and the near extinction of ‘life of balance’ cards. On top of this, there have been general interest rate increases across both purchase APRs and cash rates and subtle, but costly, tweaks to order of repayments.

Mike Naylor, personal finance expert at uSwitch.com, the independent price comparison and switching service, comments: “It’s no great surprise that every 0% balance transfer credit card now levies a charge. Historically, fee free deals fuelled the switching market and marked the birth of the rate tart, quickly turning into a huge financial drain on the industry, to the tune of around £600 million. But let’s not be too sympathetic as this is a drop in the ocean compared to the £479 million now generated annually from balance transfer fees, £71 million from cash withdrawal fees and every other ‘tweak’ to the terms and conditions which generates a small fortune for credit card companies.”

Providers embrace negative payment hierarchies

uSwitch.com research has found that more and more providers have cashed in on a negative payment hierarchy which has become increasingly unfair for consumers. This means that any repayments are first put towards the cheapest part of the balance on the credit card, with the lowest rate of interest. There has been a 17.45% increase in the number of providers that repay fees and balance transfers first, followed by purchases and then cash advances. The most expensive debt, traditionally cash advances, has the highest rate of interest and is conveniently the last to be paid off.

Increased cash advance charges and interest rates

uSwitch.com’s findings also reveal an increase in the average cash advance charge from 1.58% (2001) to 2.42% (2007), this has cost the consumer £71 million more in 2007 compared to 2001. Between 2001-2006 there was a rise of 0.38% (an average of 0.08% per year), however during the period 2006-2007 the charge has increased sharply by 0.46%.

Summary of Findings:

Balance transfer (BT) fees

In May 2005, nearly 30% of credit cards carried a BT fee – now they all do.

Fees have increased from an average of 0.59% in May 2005 to 2.73% today.

Caps on BT fees

Today, the majority (over 96%) of credit cards no longer have an upper limit.

Decline in combined 0% offers on balance transfers and purchases for the same period

In 2003, all providers offered this type of deal, now just 37% of providers do.

0% deals for 5 months on both purchases and transfers have been the greatest casualty. They made up 41% of the market in 2003 and now represent just 8%.

Cards with longer interest free balance transfer deals and shorter interest free purchase periods were non-existent in 2003 but now represent 63% of the 0% credit card market.

The most prevalent deal of this kind is now 0% on balance transfers for 12 months and 0% on purchases for 3 months, offered by 44% of providers. This type of card will certainly catch consumers out if they do not understand the complex order of repayment rules.

Near extinction of life of balance transfer cards

These cards peaked in 2005 accounting for 13.4% of the market, gradually declining to an all time low of just 5.74% today.

Naylor continues: “The credit crunch could well become a harsh reality in January when two million balance transfer customers try to carry out their next switch. A large number of customers may not be able to get another 0% deal and end up stuck with their existing provider, paying the an average APR of 16.52%. There is some evidence that lenders have tightened up their lending criteria in the mortgage market already and providers such as Barclaycard have recently reduced half a million credit limits for existing customers and rejected more than half of its new applicants. With only eight weeks to go until the New Year, we urge customers to shop around now to ensure they get the best deal.”

Naylor’s top tips for credit crunch victims

Balance transfer credit cards: Still good value for money but consumers should be prepared to pay a fee of £300 over three years on balance transfer costs on a balance of £5,000 (based on a 3% fee). This is totally dependent on being accepted for three 12 month 0% balance transfer deals.

Unsecured personal loans: Consolidating debts with a loan is also an option. On the same £5,000 debt, repaid over three years, consumers would pay £504.76 in interest on a typical APR of 6.5%. This offers peace of mind with a fixed interest rate and fixed monthly repayments.

Life of balance credit cards: A life of balance card is also an option. There are seven cards available at an average rate of 5.74%. This will stamp out the ongoing cost of BT fees as these cards do not levy this charge.

Pays to switch: Transferring £3,000 from a credit card with a typical APR of 15.9% to a 13 month 0% balance transfer card (3% BT fee), could save a consumer £396 in interest in just 18 months.

Best 0% BT credit card: Virgin Money, 0% for 15 months.

Best 0% credit card for new purchases: Halifax MasterCard, 0% for 15 months.

Best cash-back credit card: American Express Platinum Moneyback, 5% for three months, between 0.5% to 1.5% thereafter.

Naylor concludes: “The credit card industry will never be stagnant. With the glut of changes that have taken place over the past few years, most of which have not been in the consumers’ best interest, managing your finances effectively cannot be viewed as a spectator sport. There are still a lot of great deals out there, but consumers need to be willing to invest time in shopping around to make great savings.”