The current credit quagmire is a different animal to previous slowdowns, economic downturns or financial crises. Firstly it has a catchy, media-friendly name ('Credit Crunch'). Secondly and most importantly it's hit consumers harder and much earlier than previous 'economic readjustments'. The catchy title isn't to be underestimated - the media's love of the term has raised awareness amongst the general public that there is a major problem with the financial system. It's also brought home the fact that much of what is happening now is a direct consequence of the 10 years of good times had by all in the credit bonanza of the late 1990's and early 2000's. A survey by financial information analysts Moneyfacts has found that at least 10% of credit cards have raised their interest rates as a direct response to the current crisis.
The average interest rate on credit cards has risen from 16.8% to 17.2% in three months. This raise is in direct opposition to the Bank of England's base rate cut of 1.5%, bringing the base rate down to 3% in an attempt to boost the ground level economy and stave off inflation. As lenders realise that the financial pot is nearly empty, they're manoeuvring their positions to ride out the storm as best they can. Their concern is that the early impact the crunch has had on consumers means a greater risk of customers defaulting on payments. The interest rate rise on credit cards is seen as a preventative measure against any increased exposure to bad debt by the lenders.
As the financial institutions eyed each other suspiciously they also turned their attention to their customers, their confidence in the public's previous ability to meet repayments and pay back credit card debts evaporating. The lenders need continuous injections of cash into the system to carry on trading. The practice of banks lending to other banks has shuddered to a halt as financial institutions try to consolidate their own positions, and so that extra cash has to come from somewhere. Step forward, the great British public. The interest charges on loans, credit card debts, mortgages and credit agreements are the lifeline lenders need to continue doing business.
Up until 2007 the previous ten years were a boom time for credit card lenders in the UK. It wasn't just the credit crunch that stopped the credit card companies in their tracks. An extremely competitive credit marketplace, coupled with a global economic slowdown, increasing international bad debts and government regulations made the credit card lenders re-evaluate their positions. Some more panic-stricken credit card companies responded by 'dumping' thousands of customers they considered not 'profitable' - namely those who paid off their credit card balance in full every month. Other lenders are reigning in their customer's spending habits by restricting credit limits and access to cash withdrawals.
The lenders have suffered a double-blow. The loss of individual overall market share in the 1990's resulted in lenders fighting hard for the affections of a credit card loving public with a plethora of 0% offers. Card lenders are now charging up to 3% balance transfer fees to try and regain a more stable financial position and refund some of the lost earnings that 0% offers cause. The second blow was the Office of Fair Trading's decision in 2006 to impose a 12 cap on penalty fees. Now card lenders are bracing themselves for a third punch; the Complaint's Commission decision to take a long, hard look at personal protection insurance schemes that are often mandatory additions to credit card agreements.
The continuing economic slowdown could really start to impact on jobs in the next 12 months, with unemployment set to climb. This is making the credit card lenders even more nervous, as the prospect of more people defaulting on their payments because of the loss of primary income increases the card lender's exposure to more 'bad debt' risk. All of this seems to imply that the era of the friend in your wallet is over, but that's not strictly true. What has happened is a readjustment of the marketplace, making it more stable for lenders and borrowers to maintain a safe position. Credit cards may have stricter approval criteria than in the boom times of the 1990's, but it also means that a more responsible approach to lending has been adopted, and that can only be a good thing. - 15224
The average interest rate on credit cards has risen from 16.8% to 17.2% in three months. This raise is in direct opposition to the Bank of England's base rate cut of 1.5%, bringing the base rate down to 3% in an attempt to boost the ground level economy and stave off inflation. As lenders realise that the financial pot is nearly empty, they're manoeuvring their positions to ride out the storm as best they can. Their concern is that the early impact the crunch has had on consumers means a greater risk of customers defaulting on payments. The interest rate rise on credit cards is seen as a preventative measure against any increased exposure to bad debt by the lenders.
As the financial institutions eyed each other suspiciously they also turned their attention to their customers, their confidence in the public's previous ability to meet repayments and pay back credit card debts evaporating. The lenders need continuous injections of cash into the system to carry on trading. The practice of banks lending to other banks has shuddered to a halt as financial institutions try to consolidate their own positions, and so that extra cash has to come from somewhere. Step forward, the great British public. The interest charges on loans, credit card debts, mortgages and credit agreements are the lifeline lenders need to continue doing business.
Up until 2007 the previous ten years were a boom time for credit card lenders in the UK. It wasn't just the credit crunch that stopped the credit card companies in their tracks. An extremely competitive credit marketplace, coupled with a global economic slowdown, increasing international bad debts and government regulations made the credit card lenders re-evaluate their positions. Some more panic-stricken credit card companies responded by 'dumping' thousands of customers they considered not 'profitable' - namely those who paid off their credit card balance in full every month. Other lenders are reigning in their customer's spending habits by restricting credit limits and access to cash withdrawals.
The lenders have suffered a double-blow. The loss of individual overall market share in the 1990's resulted in lenders fighting hard for the affections of a credit card loving public with a plethora of 0% offers. Card lenders are now charging up to 3% balance transfer fees to try and regain a more stable financial position and refund some of the lost earnings that 0% offers cause. The second blow was the Office of Fair Trading's decision in 2006 to impose a 12 cap on penalty fees. Now card lenders are bracing themselves for a third punch; the Complaint's Commission decision to take a long, hard look at personal protection insurance schemes that are often mandatory additions to credit card agreements.
The continuing economic slowdown could really start to impact on jobs in the next 12 months, with unemployment set to climb. This is making the credit card lenders even more nervous, as the prospect of more people defaulting on their payments because of the loss of primary income increases the card lender's exposure to more 'bad debt' risk. All of this seems to imply that the era of the friend in your wallet is over, but that's not strictly true. What has happened is a readjustment of the marketplace, making it more stable for lenders and borrowers to maintain a safe position. Credit cards may have stricter approval criteria than in the boom times of the 1990's, but it also means that a more responsible approach to lending has been adopted, and that can only be a good thing. - 15224
About the Author:
Mark Wright writes for various popular websites, and keeps a regular commentary on the recent financial crisis and credit crunch. Read more about credit cards here.
