Credit cards: recouping lost income

In its latest report ‘ Credit Cards in the UK’, Defaqto claims that credit card issuers have invented new charges to compensate for the loss of revenue from the cap placed on default payments by the Office of Fair Trading in August 2006.

In June 2006, the average fee for a late payment was £22.21 and this has now reduced to £11.81. Over the same period the average fee for exceeding credit limits has reduced from £22.21 to £11.73 and the returned payment fee has fallen from £20.10 to £11.39. These falls are having a significant impact on provider income.

Many providers have sought to redress the impact by increasing interest rates or other charges and, in some instances, inventing new charges.

Although some of the increase in interest rates can be explained by the rise in Bank of England base rate from 4.50% in June 2006 to 5.75% currently, other charges where rates have increased are not directly influenced by rate increases.

Commenting on these changes, David Black, Principal Consultant Banking, and author of the report said, “Credit card providers have lost a great deal of highly profitable revenue because of the charges cap and will inevitably seek ways to replace their lost income. This is even more imperative for the largest institutions because of the pressure on them arising from the knock-on effects of the sub-prime lending crisis. For these reasons, I believe that credit cards will become increasingly expensive to use over the medium term.”