2.5 million hit by credit card shake-up

Credit card providers have left no stone unturned in their mission to recover the millions of pounds lost through significant bad debt write-offs and the reduction in penalty fees imposed on the industry by the Office of Fair Trading in July 2006.

New research from uSwitch.com, the independent price comparison and switching service, reveals that last year over 2.5 million credit card accounts were hit with an annual or monthly fee, had their credit limits reduced or were closed down altogether. With 71.8 million credit cards in circulation there is a need for providers to take reasonable action to protect consumers from becoming over-indebted and to communicate their decisions in a transparent manner. However, just 16% of people caught up in this credit card ‘shake-up' missed more than one monthly repayment or exceeded their credit limit in the last 12 months - which would seem a good justification for providers to take appropriate action.

Simeon Linstead, Head of Personal Finance at uSwitch.com, comments: "We're not against credit cards providers curbing consumers' spending if their debts are genuinely getting out of hand. However, resorting to account closures, reducing credit limits and implementing annual or monthly fees without providing over 1 in 4 people with a reason for doing so is not good for consumer confidence or financial planning. Credit card companies who are taking action to close down or make changes to customers' accounts must be completely open about how and why they have selected those customers."

How much are customers worth?

21.4 million (68%) credit cardholders regularly or always pay their bill in full. These customers are the least profitable for a credit card company to have on its books unless they withdraw cash, use their card overseas or get caught out by the order of repayments. They will not be contributing much to the £6.186 billion in interest made by the credit card industry last year. It's no surprise to hear that interest remains the key revenue stream for the industry, accounting for 72% of credit card companies' income.

The most profitable group of customers are the 3.5 million (11%) cardholders making minimum repayments each month and the 21% who do not have a fixed repayment pattern on credit cards. According to the BBA the proportion of credit card balances bearing interest was 75.1% in March 2007 - with an average purchase APR of around 16%, these are the customers who are really earning the companies money.

Checking credit records

Further research also shows that 29.6 million GB adults (78%) have not have not checked]their credit record in the past 12 months. Over half (54%) of these people have never looked at it. This is the best way to stay one step ahead of credit card providers as consumers will be able to spot any errors or discrepancies that could give their credit card company cause to change their terms and conditions or even to close their account. Alarmingly, of those who did check their credit record in the last 12 months, 13% found mistakes such as payments listed incorrectly as ‘missed' and inaccurate credit limits.

Checking credit records will also flag up any credit card accounts that are no longer in use, but haven't been closed down. Dormant credit cards are not good for someone's credit record and leave consumers vulnerable to fraud, particularly if address details aren't updated.

By 2011 the number of sub-prime credit cards could rise to 7.2 million

With credit card providers trying to minimise lending risks, the sub-prime or non-standard credit card market could soon become a reality for those with a less than perfect credit history. This is inevitable given the increase in the number of insolvencies and the sharp rise in mortgage arrears - there are as many as 77 repossessions per day and 2,750 County Court Judgements issued daily. The term ‘sub-prime' always sets alarm bells ringing, but in reality, APRs on these cards can be only marginally higher or in some cases, slightly lower than some standard credit or store cards.

Simeon Linstead concludes: "If your credit card provider wants to make changes to your account that you don't like, you should challenge their decision. If you are still not happy with the outcome or don't feel you've been treated fairly, take your complaint to the Financial Ombudsman Service (FOS). While your complaint is being dealt with, you can still take your business elsewhere and search for a better credit card deal that suits your needs - there really is no need to pay an annual fee for your credit card. Finally, having your credit card account closed will not impact your credit rating as long as you don't miss any repayments.

"Credit card companies have had a rough ride with bad debt so they have tightened their lending criteria and lenders have reduced the amount of credit on offer to applicants - credit is undoubtedly harder to come by but there are still good deals out there - it's just that fewer people will be able to take advantage of them. For people who do not qualify for the next best credit card deal, there are other ways of managing this debt such as an unsecured personal loan.

"The credit card industry will never be stagnant. There is always a glut of new offers available but consumers cannot view managing their finances effectively as a spectator sport. Consumers need to be willing to invest time in shopping around to make great savings."