Credit Card Market Update

7th February 2011  

The effects of the Consumer Credit Directive (CCD) which became law on 1st February have now filtered down to the products offered by the credit card issuers, and to our comparison tables, so it’s time to review where this leaves the credit card user.

Whilst the CCD changes seem to be viewed by the press as good news for members of the public, to borrow a line from Isaac Newton, “to every action there is always opposed an equal reaction”. We can’t expect the credit card companies to continue to offer the same credit card deals, and to support those with a lower credit rating, if we legislate to reduce the return on their products. Credit card issuer’s revenues and profits are already under serious pressure as a result of the credit crunch, resulting economic downturn and the drop in retail spending.

The key CCD changes that have come into effect that give the consumer a better deal are:-

  • Card issuers are forbidden from increasing your interest rate or credit limit if you’re in financial difficulties
  • For new credit card products, the ‘minimum payment’ must cover at least the month’s interest, fees, charges and 1% of the debt.
  • Card holders can refuse an interest rate or a credit limit increase and can reduce their credit limit. In the event of an interest rate increase, consumers will have 60 days to reject the new rate. If they do so, they can close the credit card account and pay down the balance at their existing interest rate.
  • Monthly payments have to be allocated to balances carrying the highest rate of interest first, previously most credit cards assigned payments to items carrying the lowest rate of borrowing. This is the much discussed ‘positive payment order’.

However, are these changes which are aimed at improving the lot of the consumer, actually going to result in a lower quality, three tier credit card market for the public?

Figures just released by the Insolvency Service show that a record 135,089 private individuals were declared insolvent in 2010, up by 0.7% on 2009. This is an overall high since records began in 1960 and double the number recorded in 2005. The high numbers were partly due to 6.5% rise in Individual Voluntary Arrangements (up in 2010 to 50,716) where an official agreement is made between creditors and the debtor.

The numbers show a different picture to those published after the last recession in the early 1990’s. The number of personal insolvencies has grown in the last decade, and is now far greater than the numbers recorded in 1992 and 1993 of around 37,000 in each year. Personal Finance Experts say this is because the amount of credit built up by people, especially on credit cards, has ballooned in the last decade. IVAs were a new option in 1992-93 and weren’t so frequently recommended.

Credit card companies have always justified their charging structures by pointing to the high levels of fraud and customer defaults they’re faced with. If they’re no longer able to recoup these losses through charges to credit card holders, it’s likely that some people who have been able to apply and be accepted for credit cards won’t be able to any more.

In summary we’ll see a market where if you have a good credit rating you’ll be able to access the best credit card deals in the market. If you’re deemed an acceptable credit risk, you’ll be able to apply and be accepted for a credit card, but you’ll be effected more by ‘risk based pricing’ meaning you won’t be offered the advertised competitive rates. If you have a ‘below average’ credit rating, let alone a poor one, it’s unlikely you’ll be able to obtain a credit card at all.

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