The Bank of England may have given UK PLC an economic boost with its recent interest rate cut of 1.5%, but the credit crunch isn't just affecting big business and the banking sector. The average person in the street is feeling the squeeze too. So will the reduction of the base rate to 3% offer any short-term relief to the customers holding a total of 72 million credit cards, beleaguered by interest charges far and above the base rate?
While mortgage borrowers will have to wait and see if the trickle-down effect reduces the cost of their mortgage repayments, credit card customers have been warned not to expect repayments to fall. Consumers look set to continue to pay an average of 17% APR on credit cards, and that percentage is unlikely to change as a result of the rate cut. The common opinion is that rates are only cut to attract customers, and in the current economic climate, lenders are reluctant to encourage even more credit into the system. Even though the lenders would like to pass on these savings to their customers, in the current economic climate those savings may have to wait a while until the market is more stable.
The potential for 'bad debt' to eat into the profits of the credit card lenders is giving the credit card companies pause for thought. They already know that some current cardholders are increasingly having problems managing their debts, and as they struggle to make repayments it could potentially eat into the credit card company's profits. The profit is directly linked to the amount of interest charged, so any reduction would leave the credit card companies exposed to reduced profits. As a result, they're fighting hard to make sure their businesses are not squeezed by reducing interest rates too early, despite Government attempts to inject new life into the economy at street level. The Prime Minister and Chancellor have seen this reluctance to reduce rates by lenders as detrimental, encouraging Whitehall to call for a "new, responsible approach" to lending. The credit card companies disagree, saying that knee-jerk solutions will not improve the overall economic picture, but could, in fact, make it worse. They believe that maintaining the status quo in this climate is the most pragmatic approach.
Store cards are amongst some of the worst culprits of inflated interest charges, but a few credit cards also charge above-rate interest charges. The trick for the consumer is to hunt through the acres of information and find a deal that suits them. The average APR charge on credit cards has risen from 16.8% a year ago to the current average of 17.6% today, despite the interest rate almost halving from 5.75% to 3% over the same time period. Store card rates have risen faster, up by 1% over a six-month period, with the most expensive now charging shoppers more than 30%. This reluctance to replicate the base rate cut has angered government officials, leading them to accuse credit card companies of behaving 'irresponsibly' in the face of mounting pressure to mirror the base rate cut with reductions of their own. Despite continued calls by both the public and the Government, credit card lenders are remaining steadfast, insisting that rates on cards will not be changed. In truth, the credit card lenders are caught between a rock and a hard place. Interest payments are what keep credit card companies in business. At this time, reducing your capital would be a suicidal move by the card companies.
The fear is that credit card companies, suddenly aware of their exposure to 'bad debt', are coming down hard on debtors over relatively small sums of money owed on cards, sometimes after the cardholder has missed only a couple of monthly payments. The mounting interest charges can mean that the minimum monthly repayment barely covers the cost of administration charges and interest payments. The Citizen's Advice Bureau backs up this claim, saying that 20% of all new debt inquiries in 2007-08 related to credit card, store card and charge card debts. The Consumer Credit Counselling Service also stated that it had seen a surge in 'charging orders' by card firms, as the lenders try to minimise their debt positions.
The US has responded to the credit crisis by ensuring that interest charges to credit cards have been mirroring the base rate cut, but the UK has yet to follow suit, despite only a 2% difference in base rates between the two countries. Card lenders put the blame squarely on the Government?s shoulders, claiming that regulation such as the Office of Fair Trading?s 2006 decision to put a ?12 cap on penalty fees, as well as their own falling profits on payment protection insurance, is responsible for increasing the cost of credit. They claim that this leaves them unable to reflect changes in the base rate by cutting the APR rate on credit cards. With this in mind, reductions in credit card interest rates look unlikely any time soon. However, with a little bit of legwork and a pocket calculator, a clever consumer can still find some good credit card bargains, with some card lenders bucking the trend and continuing to offer incentives to new and existing customers.
While mortgage borrowers will have to wait and see if the trickle-down effect reduces the cost of their mortgage repayments, credit card customers have been warned not to expect repayments to fall. Consumers look set to continue to pay an average of 17% APR on credit cards, and that percentage is unlikely to change as a result of the rate cut. The common opinion is that rates are only cut to attract customers, and in the current economic climate, lenders are reluctant to encourage even more credit into the system. Even though the lenders would like to pass on these savings to their customers, in the current economic climate those savings may have to wait a while until the market is more stable.
The potential for 'bad debt' to eat into the profits of the credit card lenders is giving the credit card companies pause for thought. They already know that some current cardholders are increasingly having problems managing their debts, and as they struggle to make repayments it could potentially eat into the credit card company's profits. The profit is directly linked to the amount of interest charged, so any reduction would leave the credit card companies exposed to reduced profits. As a result, they're fighting hard to make sure their businesses are not squeezed by reducing interest rates too early, despite Government attempts to inject new life into the economy at street level. The Prime Minister and Chancellor have seen this reluctance to reduce rates by lenders as detrimental, encouraging Whitehall to call for a "new, responsible approach" to lending. The credit card companies disagree, saying that knee-jerk solutions will not improve the overall economic picture, but could, in fact, make it worse. They believe that maintaining the status quo in this climate is the most pragmatic approach.
Store cards are amongst some of the worst culprits of inflated interest charges, but a few credit cards also charge above-rate interest charges. The trick for the consumer is to hunt through the acres of information and find a deal that suits them. The average APR charge on credit cards has risen from 16.8% a year ago to the current average of 17.6% today, despite the interest rate almost halving from 5.75% to 3% over the same time period. Store card rates have risen faster, up by 1% over a six-month period, with the most expensive now charging shoppers more than 30%. This reluctance to replicate the base rate cut has angered government officials, leading them to accuse credit card companies of behaving 'irresponsibly' in the face of mounting pressure to mirror the base rate cut with reductions of their own. Despite continued calls by both the public and the Government, credit card lenders are remaining steadfast, insisting that rates on cards will not be changed. In truth, the credit card lenders are caught between a rock and a hard place. Interest payments are what keep credit card companies in business. At this time, reducing your capital would be a suicidal move by the card companies.
The fear is that credit card companies, suddenly aware of their exposure to 'bad debt', are coming down hard on debtors over relatively small sums of money owed on cards, sometimes after the cardholder has missed only a couple of monthly payments. The mounting interest charges can mean that the minimum monthly repayment barely covers the cost of administration charges and interest payments. The Citizen's Advice Bureau backs up this claim, saying that 20% of all new debt inquiries in 2007-08 related to credit card, store card and charge card debts. The Consumer Credit Counselling Service also stated that it had seen a surge in 'charging orders' by card firms, as the lenders try to minimise their debt positions.
The US has responded to the credit crisis by ensuring that interest charges to credit cards have been mirroring the base rate cut, but the UK has yet to follow suit, despite only a 2% difference in base rates between the two countries. Card lenders put the blame squarely on the Government?s shoulders, claiming that regulation such as the Office of Fair Trading?s 2006 decision to put a ?12 cap on penalty fees, as well as their own falling profits on payment protection insurance, is responsible for increasing the cost of credit. They claim that this leaves them unable to reflect changes in the base rate by cutting the APR rate on credit cards. With this in mind, reductions in credit card interest rates look unlikely any time soon. However, with a little bit of legwork and a pocket calculator, a clever consumer can still find some good credit card bargains, with some card lenders bucking the trend and continuing to offer incentives to new and existing customers.
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