James Daley: Another nail in the 'free banking' coffin

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The Independent Online

Credit card companies became the latest corner of the financial services industry to receive a public dressing down by the Government this week – after a mini storm began to brew about how high their interest rates have risen in recent years. Seizing the political initiative, consumer minister Gareth Thomas strongarmed lenders into signing up to a new code of “fair principles”, which will make it much more difficult for them to raise their rates in future, even if they think their customer is becoming a worse credit risk.

As a consumer, I suppose I should be glad about all this. After all, many credit card rates are more than 10 times the current Bank of England rate, and have shown no signs of easing as the Bank rate has been sharply cut in recent weeks. But as someone who pays off the balance on my credit cards in full every month, and who knows better than to do any long-term borrowing via such an expensive means, I can’t help feeling that this will prove to be yet another nail in the coffin for so-called “free banking”.

Credit cards in the UK are incredibly good value if you use them responsibly. Most allow you to borrow entirely free of charge for up to almost two months, as long as you pay off your balance in full by the deadline. Furthermore, many also come with generous cash-back or loyalty schemes, which reward you every time you use your card. And for all this you usually pay no fees whatsoever.

Even if you miss a payment, you can’t be charged more than £12 – pretty reasonable when compared to the fees banks levy for busting your overdraft limit.

In the US, and most other countries, credit cards are not nearly as good value – monthly fees are commonplace and interest-free periods are shorter. And the interest rates are just as high too – even though the US Federal Reserve Rate is half what our Bank rate is at the moment. Too much pressure on the UK card companies – especially at fragile times like these – will only force them to start charging annual fees as well.

Credit card interest rates have never been in step with central bank rates. They’re designed for shortterm borrowing and to help manage cash-flow. But clearly, with interest rates approaching 20 per cent a year, they’re not the way to borrow for the long-term The problem is that too many people still use them in this inefficient way.

Given the rising number of low-income households that are struggling with high credit card balances, it was surely right for Mr Thomas to lean on card companies to take a more lenient line this week. But there’s a longer-term problem here – a lack of education – which the Government also needs to address.

Credit card companies should be forced to explain to consumers, when they take out a card, that there are cheaper ways of borrowing. And the Government should also invest in consumer education campaigns to broaden the public’s understanding.

However, by simply putting another pair of handcuffs on the card companies the Government is only increasing the likelihood that lenders will look to other ways to boost their profits – some of which will be much less transparent than others

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