The credit crunch is a little different to previous incarnations of economic slowdowns in that it has hit the consumer much harder and much earlier on in its development. The amount of personal borrowing against credit cards and the lenders' response to this particular crisis may have a great deal to do with that early-doors impact. A survey by the financial information analysts Moneyfacts has found that at least 10% of credit cards have raised their interest rates or fees as a direct result of the economic storm now battering UK PLC.
As a consequence, the average APR on credit cards has risen from 16.8% to 17.2% in just over three months. This upward trend is a direct counter to the Bank of England's 1.5% recent base rate cut, which brought the base rate down to 3% in an attempt to cool the prospect of rising inflation. This particular credit crunch is biting hard across the board. The slush fund banks use to lend to each other is running dry and this time consumers are feeling the squeeze as well. As a result consumer spending has dropped markedly meaning that even less money goes into the economy, perpetuating the situation. In lender's eyes, this lack of available cash means that customers pose a greater risk to the credit card companies due to the increased chance of defaulting on payments. But rather than just shoring up via interest charges, lenders are being much more proactive this time to try to stabilise the market for everyone.
As the financial institutions lost faith with each other, they tightened up on lending criteria across the board. This was primarily to stabilise an already shaky marketplace and stop everyone running the risk of 'bad debt', both lenders and borrowers alike. The lenders need money to continue trading and as borrowing from other banks and financial institutions has practically stopped, the only way for them to get the money they need to continue in business is to increase interest charges on credit agreements, loans, credit cards and mortgages. This signifies an end to the 'live now, pay later' lifestyle that the First World industrial countries have enjoyed for so many years.
From 1997 until 2007, the lenders were having a boom time in the UK. But the credit crunch wasn't the only thing that seemed to stop the good times in their tracks. An increasingly competitive marketplace, the emergence of economic superpowers like China and India, increasing bad debts and government legislation all contributed to the lenders reassessing their financial positions. Some companies responded by 'dumping' thousands of customers who were seen as non-profit clients - the people who paid off their balance in full each month and incurred minimal interest charges. All lenders have tightened up their criteria for lending, including restricting credit limits, imposing higher fees on balance transfers and limiting access to cash withdrawals. Although this may seem like a further indication that things are getting worse, it could actually be the right move - stabilising the credit market and reducing the possibility of credit card customers borrowing more than they can afford to pay back. The credit card lenders may actually lead the way in market recovery by this simple readjustment of open lending policy.
The credit card industry has suffered a double-whammy. The loss of overall market share in the late 1990's resulted in a scramble by lenders for customers, enticing in consumers with 0% balance transfer offers and cashback schemes. That has all now changed, with most cards imposing up to 3% balance transfer fees in an attempt to regain lost profits as a result of the 0% offers. The second blow was the decision in 2006 by the Office of Fair Trading to impose a 12 cap on penalty charges. Now lenders are bracing themselves for another knock-back as the Complaint's Commission takes a close look at personal protection insurance schemes imposed by lenders on many credit card deals.
The continuing economic slowdown could really start to impact on jobs in the next 12 months, with unemployment set to climb. This is making the credit card lenders even more nervous, as the prospect of more people defaulting on their payments because of the loss of primary income increases the card lender's exposure to more 'bad debt' risk. All of this seems to imply that the era of the friend in your wallet is over, but that's not strictly true. What has happened is a readjustment of the marketplace, making it more stable for lenders and borrowers to maintain a safe position. Credit cards may have stricter approval criteria than in the boom times of the 1990's, but it also means that a more responsible approach to lending has been adopted, and that can only be a good thing.
As a consequence, the average APR on credit cards has risen from 16.8% to 17.2% in just over three months. This upward trend is a direct counter to the Bank of England's 1.5% recent base rate cut, which brought the base rate down to 3% in an attempt to cool the prospect of rising inflation. This particular credit crunch is biting hard across the board. The slush fund banks use to lend to each other is running dry and this time consumers are feeling the squeeze as well. As a result consumer spending has dropped markedly meaning that even less money goes into the economy, perpetuating the situation. In lender's eyes, this lack of available cash means that customers pose a greater risk to the credit card companies due to the increased chance of defaulting on payments. But rather than just shoring up via interest charges, lenders are being much more proactive this time to try to stabilise the market for everyone.
As the financial institutions lost faith with each other, they tightened up on lending criteria across the board. This was primarily to stabilise an already shaky marketplace and stop everyone running the risk of 'bad debt', both lenders and borrowers alike. The lenders need money to continue trading and as borrowing from other banks and financial institutions has practically stopped, the only way for them to get the money they need to continue in business is to increase interest charges on credit agreements, loans, credit cards and mortgages. This signifies an end to the 'live now, pay later' lifestyle that the First World industrial countries have enjoyed for so many years.
From 1997 until 2007, the lenders were having a boom time in the UK. But the credit crunch wasn't the only thing that seemed to stop the good times in their tracks. An increasingly competitive marketplace, the emergence of economic superpowers like China and India, increasing bad debts and government legislation all contributed to the lenders reassessing their financial positions. Some companies responded by 'dumping' thousands of customers who were seen as non-profit clients - the people who paid off their balance in full each month and incurred minimal interest charges. All lenders have tightened up their criteria for lending, including restricting credit limits, imposing higher fees on balance transfers and limiting access to cash withdrawals. Although this may seem like a further indication that things are getting worse, it could actually be the right move - stabilising the credit market and reducing the possibility of credit card customers borrowing more than they can afford to pay back. The credit card lenders may actually lead the way in market recovery by this simple readjustment of open lending policy.
The credit card industry has suffered a double-whammy. The loss of overall market share in the late 1990's resulted in a scramble by lenders for customers, enticing in consumers with 0% balance transfer offers and cashback schemes. That has all now changed, with most cards imposing up to 3% balance transfer fees in an attempt to regain lost profits as a result of the 0% offers. The second blow was the decision in 2006 by the Office of Fair Trading to impose a 12 cap on penalty charges. Now lenders are bracing themselves for another knock-back as the Complaint's Commission takes a close look at personal protection insurance schemes imposed by lenders on many credit card deals.
The continuing economic slowdown could really start to impact on jobs in the next 12 months, with unemployment set to climb. This is making the credit card lenders even more nervous, as the prospect of more people defaulting on their payments because of the loss of primary income increases the card lender's exposure to more 'bad debt' risk. All of this seems to imply that the era of the friend in your wallet is over, but that's not strictly true. What has happened is a readjustment of the marketplace, making it more stable for lenders and borrowers to maintain a safe position. Credit cards may have stricter approval criteria than in the boom times of the 1990's, but it also means that a more responsible approach to lending has been adopted, and that can only be a good thing.
About the Author:
Mark Wright writes regularly on the topic of the recent financial crisis, and educates readers on what to expect regarding the credit crunch. Read more about credit cards here.
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