Virgin under fire with credit card rate hike

20th March 2012  

In a move that has taken credit card customers by complete surprise, Richard Branson’s Virgin Money has hiked interest rates on the credit cards of some card holders by as much as 50%. And despite a chorus of disapproval and shock from consumer finance commentators, Virgin Money has basically told customers to either swallow the new charges, or pay off their balances and close their accounts.

New rates – no discussion!

Customers are understandably quick to point out that this huge jump in borrowing costs is in complete contradiction to Virgin Money’s much lauded advertising campaign, where they claimed to be improving service and provide value for their customers. The interest rate hike is anything but, and customers have been confronted with a “take it or leave it” attitude from the bank when they’ve called to complain.

The increased rates don’t apply to all Virgin Money’s 2.5 million customers just to a select 20,000 who’s accounts have recently been subject to a risk review.

Rates on uncleared purchase balances on Virgin credit cards (which are currently underwritten by MBNA) have rocketed from 16.8% to a distinctly unfriendly 24.9%. Average rates from other credit card providers are currently 18.9%.

Interest rates on existing balance transfers (i.e. on balances out of promotional offer periods) have also shot up from 18.9% to a staggering 27.9%.

The move comes just days after mortgage lenders including the Halifax hit cash-strapped customers with a rise in standard variable rates. It also comes hot on the heels of Sir Richard’s own promise to “bring fresh ideas and an injection of new competition” into banking as a whole.

Is this the Northern Rock connection?

Some pundits feel that the rate hike on Virgin Money’s credit cards is an attempt to raise funds to pay back its purchase of Northern Rock – a claim strenuously denied by Virgin.

The takeover cost Virgin £747 million with another £50 million due over the next six months. Instead, Virgin claim that the rate hike is part of a regular review they carry out of the risk levels within their credit card portfolio. They also state that their ‘take it or leave it’ approach is standard industry practice.

Whilst the rate increase may comply with the letter of the law (the Consumer Credit Directive allows credit card issuers to increase rates once in each 6 month period) it’s left a bitter taste in the mouths of thousands of credit card customers, particularly those who have recently transferred over to Virgin based on their previously competitive interest rates.

And it could be a dark warning of things to come too. Industry experts believe that Virgin is merely one of the first credit card provider to make the move to higher interest rates, and that other providers will quickly follow suit as they re-asses the risks posed by customers on their books that have weak credit scores or a damaged credit history.

Whilst its easy to sympathise with customers who are affected by the Virgin rate rise, this type of action is likely to become commonplace in the future. Credit card issuers are taking a much more robust line on managing risk and reward in their lending books.

They’re also being much more choosy about taking on new customers. The subject of risk is now most card issuer’s primary concern and this is leading to only the very most credit worthy consumers being offered the market leading promotional rates.

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