Paul McIndoe is an online, freelance journalist and keen hillwalker. He lives in Edinburgh with his two dogs.
Accountants Pricewaterhouse Coopers are warning holders of UK credit cards that they may find their credit limits reduced in the run-up to Christmas, as financial institutions focus on reducing their exposure to bad debt by attempting to improve the quality of their lending, following the global financial markets credit crisis.
Because many lenders had their fingers burned as a result of the sub-prime market collapse in the US, the knock-on effect is to make those companies belatedly think about the quality of their own lending. So, not only are the credit card companies slashing existing customer’s credit limits but they are also refusing a growing number of new applications, leaving many people forced to reconsider their Christmas spending plans.
The credit card companies are taking this action in an attempt to stem declining profits. Pricewaterhouse Coopers ‘Precious Plastic 2008’ report highlights the fact that credit card companies have been suffering from falling profits for a number of years due to fierce competition and rising bad debt write-offs. Since 2000 profits of UK credit card companies have dropped £4 billion and the collapse of the US sub-prime market has merely added to these woes, hence why the credit card companies are taking such drastic action.
As well as the restrictions imposed there has also been a shift in the marketing of UK credit cards. Now headline offers include 18-month interest-free transfer balances, but the small print reveals that they are now inevitably tied into a minimum retail spend. As the balance transfer must be repaid before any retail purchase balance can be reduced, interest quickly accrues even on a modest retail spend.
Credit card deals are still being widely advertised but many companies are now cherry-picking their new customers, approving only those that have excellent credit ratings in order to improve the quality of their customer base. Whereas in the past applicants could compare credit cards and the benefits they brought, thus choosing best one for them, now there are finding that it is the credit card companies that are making the choices.
That is bad news for any potential switchers as the report also highlights that many households in the UK are struggling under growing debt, compounded by increasing mortgage payments. Many householders are stretched to their borrowing limit, prompting fears that there will be a rise in defaults and repossessions. The lifeline of being able to transfer debt on credit cards to another card on an interest-free basis may no longer be available to many.
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