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Credit card rates set to rise
09.11.09
Credit card providers look set to hike their interest rates and introduce annual fees as they battle to survive, a report claimed today.
Lenders' current business models are "unsustainable" due to increasing bad debts, funding constraints and the toughest economic conditions for a generation, PricewaterhouseCoopers (PwC) said.
It said large scale change within the sector was inevitable during the coming few years, with credit cards likely to be transformed from borrowing tools into payment ones.
It added that the interest rates cards charged were likely to be increased, while annual fees charged for just having a card were likely to become a common feature.
At the high end of the market, it expects customers to be charged to have access to premium benefits, while at the lower end, marginal customers will be expected to pay fees for even standard credit cards.
Innovation is also likely to be a key feature of the market, with providers increasingly likely to offer contactless cards, prepaid cards and mobile payments.
The group said total household borrowing had remained broadly constant during the past 12 months at around £1.5 trillion, around £1.2 trillion of which is secured lending, while around £230 billion is unsecured and owed through credit cards, loans and overdrafts.
The average UK household now owes £60,000, made up of a mortgage of around £50,000 and £10,000 of unsecured debt.
As a result, the average household spends around 15% of their take-home pay just on interest payments on debt.
Richard Thompson, partner at PwC, said: "Over the last 12 months there has been a cooling passion for plastic - credit card borrowing has fallen by 3% to £64 billion and the number of cards in circulation has fallen by 8%.
"Bad debts in the sector have reached historic highs, standing at nearly 6% of outstanding balances. Our analysis suggests that bad debts are likely to continue to rise and could reach 9% by the end of 2010.
"This would have enormous implications for the profitability of credit cards in the UK market. Large scale change within the sector over the next few years is inevitable."
The group said as the economic recovery gained momentum, consumer demand for credit was likely to return, but lenders were likely to be either unable or unwilling to meet this demand.
Instead they would focus on the customer groups that were most profitable, forcing some consumers towards the "less mainstream" corners of the industry.
Reader views (4)
Credit Card companies have been making super-normal profits for years.
Its time the government started to fully regulate credit card interest rates
- Jonathon, Twickenham
Current credit card rates already range between 12 -28% APR . we were suckered into low card rates , and offered limits way above our incomes. Now the Card companies want to screw us on the resultant post boom time balances . With ridiculous rates way above any Bank of England lending rates.The goverment should intervene in this matter and fix all outstanding Credit card debt at B. Eng. Rate until it is paid off.
- Bert, Wickford , England
"Bad debts in the sector have reached historic highs...implications for the profitability of credit cards in the UK market..." So who is going to pay for it? Not the banks, who gave the cards to high-risk customers (who then, suprise suprise, defaulted on their cards) but the low-risk customers, who will pay through annual fees and higher interest payments. Something wrong here? You bet there is. Perhaps a first step should be for the banks to tighten up on how they issue cards and withdraw some of the cards they have already issued????
- Trevor, London
Don't use credit cards; that will shut them up,
Cash is King: no money, no credit, and that in turn equals no debts at all.
- Mickinlondon, london
