David Prosser: New tricks from old dog Barclaycard
Saturday 03 June 2006
Does Barclaycard, Britain's biggest credit card lender, think its customers are stupid? This, remember, is the company whose chief executive famously told MPs he had warned his own family that credit cards were an expensive way of borrowing.
The lender's latest insult to customers is a significant increase in the cost of borrowing on its plastic. Around 10 per cent of Barclaycard borrowers - roughly 900,000 customers - will be affected by increases of up to 5 per cent to the standard interest rate on the card. In some cases, customers will now pay as much as 29.9 per cent.
In addition, all customers will have to pay a substantially higher rate of interest when they use their Barclaycard to get cash from a cash machine. The rate on cash advances is rising from 21.9 per cent to 27.9 per cent - almost a third more.
How does Barclaycard justify these swingeing hikes? After all, the Bank of England's base rate has not risen since August 2004.
In fact, it turns out that it's all the fault of the nasty old Office of Fair Trading that Barclaycard borrowers face rising bills. In April, the OFT told the credit card industry that the fees it charged customers for late payments or failed transactions - often as high as £30 - were illegal as well as outrageous.
Under consumer protection laws, lenders are allowed to cover their costs when customers miss payments or exceed their borrowing limits, but they must not make a profit on penalty fees. On this basis, the OFT said it could not see how penalty fees of more than £12 could possibly be legal.
Six weeks later, Barclaycard and its colleagues in the credit card business say they still think the regulator's interpretation of the law is wrong. But they don't have the guts to take the OFT on. Barclaycard this week sheepishly announced it would cut all its penalty fees to £12 with effect from 1 August (other lenders are announcing similar reductions). The sting in the tail, however, is the interest-rate increases, which were announced at the same time.
That Barclaycard now feels the need to raise the cost of borrowing exposes one of the lies that credit card lenders put to the OFT when they were campaigning against a crackdown on penalty charges.
Consumer groups have argued that penalty charges have risen to £25 or £30 simply in order to inflate lenders' profits. While many lenders have been competing fiercely on headline interest rates, they've quietly been recouping the cost of this price war with higher fees for late payments.
Naturally, Barclaycard and its rivals reject this argument, not least because their lawyers understand the position on punitive contracts just as well as the legal department at the OFT. But the fact that Barclaycard is now seeking to raise additional revenue to replace what it will lose on penalty charges tells you everything you need to know about the realities of the situation.
This isn't just about a few pennies. The OFT estimates credit card lenders took around £300m in penalty fees last year, with an average charge of around £22.70. Assuming all charges fall to £12, the industry's total revenue from the fees would fall by almost £160m. If other lenders follow Barclaycard's example, this is what borrowers will now pay in extra interest.
To add insult to injury, customers who can least afford to pay more are likely to be hardest hit. Anyone who pays their bill in full each month won't pay any interest at all, so the rate applicable on their cards is not relevant. Plus, the 10 per cent of Barclaycard customers hit by rate increases on standard spending just happen to be those currently paying the highest rates - that is, those with less good credit ratings.
The industry's defenders argue that if people don't want to pay high penalty charges, they simply have to make sure bills are paid on time and that they don't exceed borrowing limits.
True enough, but that argument rather misses the point. The OFT didn't rule against lenders because it was concerned about whether borrowers were being unfairly charged. The regulator simply warned that credit card companies were breaking the law.
Deprived of the opportunity to cash in on illegal behaviour, Barclaycard now feels compelled to turn the screws on its customers another way.
n n n This week's report on the failings of the tax credits system predictably produced some catastrophic headlines for the Government and, in particular, the Chancellor, Gordon Brown, who invented the scheme. One in two tax credit calculations made last year was wrong and 1.9 million families were told to repay overpayments, with serious financial hardship often the result.
However, while it would be stupid to present the tax credits scheme as a success, dogged as it has been by problems since its launch in 2003, we should not get rid of it just yet.
The theory of tax credits is sound. They boost family income without acting as a disincentive to work - a major advance on all previous means-tested benefits. Moreover, there are signs that the Government is finally getting to grips with the flaws in the scheme.
Last month, the amount of extra income that families may earn without having to make an immediate declaration to HM Revenue & Customs was raised to £25,000. That should significantly reduce the number of overpayments made in future.
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