Credit card squeeze: has borrowing on plastic had its day?
The credit card market in Britain may be unsustainable.
Saturday 14 November 2009
Borrowing on plastic could soon be a distant memory. The days of interest-free credit cards could soon be over as we move to a world of higher charges and monthly or annual fees. Meanwhile more and more borrowers are facing being turned down by mainstream credit cards, forcing them to turn to expensive alternatives.
The warning came this week from the accountant firm PricewaterhouseCoopers in its Precious Plastic report. The beancounters say the UK credit card market is unsustainable in its current form because of increasing bad debts, funding constraints and the toughest macro-economic climate in a generation. On top of that, there is set to be further pressure next June with the introduction of a Consumer Credit Directive which will increase the burden of regulation on card providers, by forcing them to provide substantial additional information to potential customers before they sign up for new cards.
"Consumers do not fully appreciate the likely future changes to the market," warns Richard Thompson, partner at PricewaterhouseCoopers. "As the recovery gains momentum, consumer demand for credit will return. Lenders will be unable or unwilling to increase supply sufficiently to match demand. This will leave consumers surprised at both the cost of credit and the difficulty in gaining access to it.
"Lenders will focus on those customer segments that are the most profitable, rather than those that are in the most need of credit. Some consumers will therefore be forced towards the less mainstream corners of the industry in search of credit, a trend that may not be in their interest."
In short, almost all credit card borrowers will lose out. Those that are granted a plastic card will face higher fees, while those turned down by lenders will face the prospect of being forced to turn to rip-off lenders for short-term loans. The net result could be a massive cut in credit card usage. "We're likely to see credit cards being reinvented as payment rather than borrowing tools," says Mr Thompson.
The rot set in for the credit card companies back in August 2006 when a £12 cap was put on default charges for a customer going over a credit limit, making a late payment, or bouncing a monthly payment. The Government had been forced to act against the lenders after they had been widely accused of rip-off profiteering by charging around £30 a time for penalty charges.
Since then a crackdown on expensive, but lucrative, payment protection insurance has hit profits, and credit card firms are also paying for encouraging too many people to build up unaffordable credit on their cards. Mr Thompson says: "Bad debts in the sector have reached historic highs, standing at nearly 6 per cent of outstanding balances. Our analysis suggests that bad debts are likely to continue to rise and could reach 9 per cent by the end of 2010. This would have enormous implications for the profitability of credit cards in the UK market."
Fraud is also proving expensive and, increasing the pressure on plastic card companies, the Office of Fair Trading is examining credit card cheques, the order of repayment allocation, increasing minimum repayments and limiting the circumstances in which the card companies can increase interest rates charged on existing debt.
"We may have seen the peak of the credit card market," says David Black, banking analyst at Defaqto. "Prepaid cards, debit cards and the likes of PayPal are steadily gaining market share, and if the credit card loses some more of its allure the downward trend may continue."
However, he predicts that credit cards will remain popular for their convenience. "The credit card will retain is its ability to deal with a crisis. When the boiler breaks down or you are hit with an unexpected bill for your car, there is little to quickly rival the flexibility of the credit card. There is a market for the credit card but it looks likely to get smaller."
There's a general acceptance in the financial industry that fee-charging credit cards look set to be the norm, with credit card companies keeping a close eye on moves by American Express and Egg to introduce charges on their cards.
Andrew Hagger of Moneynet.co.uk says: "Card companies will have to review the way they drive revenue, and it's highly likely that we may see more providers follow the lead from Egg Money with either monthly or annual subscription fees.
"I think card providers will be able to get away with low-level fees as long as the customer feels they are getting value," says Mr Hagger. "The Egg Money World MasterCard charges £1 per month, but does offer one of the best cashback deals on the market, plus a useful extended warranty for purchases of electrical goods," he points out.
The introduction of fees and tighter lending rules ahead will be a good things, claims Annie Shaw of Cashquestions.com. "The PricewaterhouseCoopers predictions about the credit card market are only common sense," she says. "The massive splurge in lending was fuelled by lemming-like competition among the card companies over the past few years, which saw them offering massive credit limits, gimmicky introductory offers and gifts, multiple cards and even allowing new customers free credit by way of 0 per cent transfer deals. But this all had to come to an end one day.
"Credit card companies have been nothing if not notorious for unfair charges, reckless lending and sneaky marketing tricks. If responsible behaviour and a sales strategy that encourages sensible borrowing means a contraction in the market, then it seems a reasonable price to pay," says Ms Shaw. Peter Harrison, credit cards expert at moneysupermarket.com, says people have already been paying the penalty for credit card company woes. "In January this year, the average APR was 17.06 per cent, but this has now risen to 18.22 per cent. This means that for those only making the minimum payments on their credit cards with a balance of £2,500 it would take a further nine months to pay off the card with the new rate, with an additional £213.33 in interest."
Mr Harrison says the introduction of fees will help to improve the tarnished image of credit cards. "Sustainability and transparency are key to the future of credit card lending in the UK. With the current model looking less and less viable each day, the industry must adapt to survive. The increase in bad debt may see the introduction of annual fees, which could bring about greater trust in this form of borrowing and ensure that credit card customers are treated fairly, as long as it is clear and upfront and other 'hidden' charges are abolished as a result.
"Consumers should be aware that credit cards are likely to be more difficult to come by next year, so it is likely that borrowers will have to turn to their current account provider to obtain a suitable deal."
Smart plastic: The best current credit card deals
We asked David Black, banking analyst at Defaqto, what the best deals on plastic cards are at the moment. These are his picks, although he points out they are only available to those with excellent credit ratings.
* 0% introductory purchases
Tesco ClubCard MasterCard: 0% introductory rate on purchases for 12 months. Typical APR 16.9%
* 0% balance transfers
Virgin Credit Card: 0% introductory balance transfer for 16 months (2.98% balance transfer fee); Typical APR 16.6%
* Lowest standard purchase rate
Barclaycard Platinum Simplicity Credit Card @ 0.553% per month; Typical APR 6.8%
* Overseas purchases
Santander Zero Credit Card (from Abbey or Alliance & Leicester): no fee on overseas purchases. Typical APR 18.9%
* Cashback rewards
American Express Platinum Cashback Credit Card: "Earn 5% cashback for the first three months up to a maximum of £100.After the first three months you'll earn up to 1.25% cashback, depending on how much you spend on the card. Spend under £3,500 in the year and earn 0.5% cashback. Spend between £3,501 and £7,500 to earn 1% cashback. Spend over £7,501 in the year and earn 1.25% cashback". Typical APR 19.9%
Egg Money Card: 1% cash back (max cashback £200 per year (ie total spend £20,000); not paid if cashback less than £5 (ie if total spend less than £500). But Egg has £1 monthly fee so need to spend £100 each month for the cashback to cover the monthly fee. Typical APR 17.8%
* Other rewards (if you like days out and so on)
Tesco Clubcard Credit Card is pretty good if points used for Partner Rewards. Typical APR 16.9%
Under new state pension rules we will all be much worse off
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Bargain Hunter: Our exclusive deal cuts the cost of buying foreign currency by 20 per cent
Simon Read: 'Savers, take action - only £75,000 of your nest-egg will be protected'
Simon Read: 'Taylor Swift tickets purchased on Viagogo were cancelled hours before the concert'
- 1 This is surely the best way to watch Jaws
- 2 Homeless man playing piano in Florida becomes instant online sensation with public performance
- 3 Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
- 4 San Francisco TV news crew attacked by armed robbers during live broadcast
- 5 Greek debt crisis: The photograph that conveys the despair of Greece's elderly
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.