Halifax credit card link to BoE

15th April 2011  

There’s dire news on the horizon for credit card holders this week as the Halifax Bank of Scotland (HBOS) became the first major lender to announce that it will be linking the interest rates of its credit cards to the Bank of England base rate. The move is part of a complete restructuring in the way the bank charges customers for their credit card borrowings.

The new pricing structure, which will come fully into force from August 2011, is cleverly designed as it will allow impending card rate rises in the coming months to be blamed on the Government and the Bank of England (BoE) and not the Halifax Bank of Scotland themselves.

HBOS, part of the colossal Lloyds Banking Group (LBG) which is still part owned by the tax payer, is also linking financial data from all the customer’s financial products to their credit card interest rates. Using information supplied real-time by credit reference agencies, and internal information from other LBG subsidiaries, HBOS will be the first major bank to increase the rates you pay if they for any reason consider that you are becoming a higher risk borrower.

In theory this means that if you make a late payment for instance on a car loan with a completely different company, Halifax Bank of Scotland may assess your credit card borrowings to suddenly have become higher risk, and hike your credit card interest rate.

Many banks have been using ‘Risk Based Pricing’ to allocate risk related rates to new credit card customers for some time, but this is the first time consumers have had to face the fact that if times get tough, their interest rates will automatically start to increase, further increasing pressure on their finances.

With HBOS, each credit card customer is to be allocated a ‘personal interest rate’ based on the average interest rate applied to their balances between January and March 2011, plus the base rate, currently 0.5%. Customers who have drawn cash on their credit cards in the first 3 months of the year will automatically be assessed as higher risk and will be allocated a higher starting rate.

Halifax Bank of Scotland are also the first to end the practice of charging different interest rates for different types of balances, meaning purchases, cash advances and balance transfers (out of promotional periods) will all be charged at the same new personal rate.

Ken Stannard, credit card Director at Lloyds Banking Group, was quick to comment that:

“We are trying to be very transparent about the way we do our pricing.”

“Our customers tell us that one, simple rate makes it easier to understand their credit card, and they want to better understand how and why their interest rates may change.”

However, consumer groups are already blowing a foul on the announcement stating that HBOS and indeed most other credit card lenders haven’t really reduced their rates to borrowers over the last 5 years, despite the base rate falling to the lowest rate for 50 years. The Bank of England base rate has been 0.5% since March 5th 2009. It seems outrageous that now recovery is underway and its likely we’ll see a steady rise in the base rate, they should chose this time to tie their lending rates to the rising base rate.

The new rules will initially affect some 200,000 of Halifax and Bank of Scotland credit card customers who have held their cards for six months plus, with new customers and consumers who hold the group’s Clarity card moved to the new pricing structure in 2012. However, its seems likely that as this pricing strategy can only have come from the board of the Lloyds Group, that it will eventually be rolled out across all of LBG’s 15 million customers.

With such a major player in the market making a move that clearly other banks may have been considering for some time, no doubt it won’t be long before they all jump on the band wagon as well.


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