Andrew Hagger: Credit card customers getting a raw deal
Saturday 07 May 2011
Last month Halifax announced that it would be linking existing customers credit card interest rates to base rate with effect from this November, a move that not surprisingly went down like a lead balloon amongst the media and on money internet forums.
It seems that card providers change the rules and their messages when it suits them, as long as profit margins are maintained, and if the customer ends up paying even more as a result, well that's tough – and hopefully no one will notice anyway.
Ever since base rate hit its current low point of 0.5 per cent back in March 2009, calls for credit card rates to be reduced in line have swiftly been rebuffed on the grounds that the post-crash fragile economic climate is a far more risky and expensive place in which to operate for lenders. Also we have been regularly reminded that there is no direct link between base rate and credit card interest rates – until now.
You also have to question the timing of such a move, with base rate at a record low, the customer's interest bill is only going to go one way, and that's in favour of the card companies.
So what would the situation have been for credit card customers if this rate linking strategy had been in place three years ago?
Between April 2008 and March 2009, base rate was slashed by 4.5 per cent as the Government tried to prevent the country sliding into an even deeper recession than the one we eventually experienced, and although customers' savings rates were all but wiped out, the cost of borrowing, including on plastic, didn't mirror these downward movements.
In terms of pounds and pence, the impact on consumers has been quite considerable as the following example illustrates. For someone with a credit card balance of £3,000 at a rate of 18 per cent APR from March 2009 (when base rate hit 0.5 per cent) to today and they paid the minimum payment of 3 per cent each month, the customer would have paid their card company a total of £912. If their interest rate had been linked to base rate then they would have paid a reduced rate of just 13.5 per cent APR on their balance, resulting in interest charges of £635, a saving of £277.
£277 is not an insignificant saving for a credit card customer, and even though only a percentage of card customers will fit this exact scenario, there will be borrowers with far bigger balances and hence the overall profit boost for the card providers will have been massive.
Perhaps this explains why we are still seeing endless 0 per cent balance transfer deals, because super deals for new customers are being subsidised by loyal cardholders. While credit card companies, like any business, need to be profitable, it's the blatant moving of goalposts that upsets customers and another reason why there is so much ill-feeling and a general lack of trust in the UK financial service industry.
Don't read too much into the increased number ofmortgage products
Although recent reports suggest that there are now in excess of 10,000 mortgage products for consumers to choose from, I'm not sure we should be getting too carried away just yet.
Whilst these latest figures represent a vast improvement on the numbers witnessed in the summer of 2009 when the product count was below 3,000, a wider choice of home loans isn't translating to similar increases in gross mortgage lending which was virtually static during the first couple of months of 2011.
The extra products may have been a more optimistic sign if it was due to a raft of hungry new lenders appearing on the scene, but unfortunately it's more a case of established lenders expanding the price/fee and LTV combinations in their existing product lines.
In many instances pricing is still not at a level to tempt customers away from some of the ultra low SVR deals and this now looks likely to be the case for some time yet, particularly as any rate increase may not be as imminent as experts have been predicting.
The main issues still prevail regardless of the choice of products, ie strict underwriting criteria and the ability for first-time buyers to meet the demanding deposit requirements. There certainly won't be too many of the 10,000 products available to customers with only a 5 per cent or 10 per cent deposit at their disposal.
With Coalition spending cuts only just starting to kick in, it will be some time before any real consumer confidence returns.
Until then it's encouraging that there are more products for customers to choose from, but I fear that wider economic factors will see mortgage activity remain at the current subdued levels for much of 2011.
Andrew Hagger, Moneynet.co.uk
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