The Credit Card Credit Crunch

The crunch is starting to have more of an impact on the credit card market. But there are still deals aplenty for the time being.

So far the credit card market has been the area of borrowing that has been least affected by the credit crunch. A trawl of our credit card centre reveals that there are in excess of 100 cards offering 0% balance transfer deals at the moment, with over half of them lasting for 12 months or longer.

Although all of the longer offes come with a 3% balance transfer fee attached, this is arguably the best arrays of deals we've seen since Egg launched the first 0% credit card back in 2000.

Yet we have already heard many stories about people having their credit limits slashed, sometimes even if they had a picture-perfect credit history. New borrowers are also being offered lower credit limits and credit card companies are expected to get tougher when it comes to credit scoring over the next few months.

Now it seems that the credit card companies are taking even more decisive action to protect their profits, increasing both purchase rates and minimum monthly repayments.

Purchase rates increase

Moneyfacts reckons that a number of major players have increased their purchase rates in the last few months, including Barclaycard, Royal Bank of Scotland and Capital One. Another look at our credit card centre shows that the purchase APRs on most balance transfer cards remain pretty reasonable compared to other credit cards. Over sixty of the hundred balance transfer deals on offer display a typical APR of 15.9% or less.

It's worth remembering that under the rules of financial advertisements only two-thirds of successful applicants have to be given the typical APRs. So a third of borrowers will be paying more than this. And there is also no guarantee that the rate won't be increased by the time your balance transfer deal ends. Of course you can always move to another balance transfer card but you can't tell what sort of offers will then be available or if you'll be able to get any of them.

One way round this problem is to look for a credit card offering a fixed rate for the lifetime of any balance transfer. Cards are available offering rates of between 4.9% and 6.9% and these are excellent deals in the current climate. Not only is the interest rate lower than any personal loan you can get, you have more flexibility when it comes to repayment.

Minimum repayments on the rise too

One thing The Fool has often criticised is the gradual decline in minimum monthly repayments in the credit card market. A while back 10% per month was typical but over the years card companies have cut these back to 5%, 3% and even 2%.

With interest adding around 1.5% a month to your balance, if you're only paying 2% a month then it doesn't take a genius to work out that you'll only pay off a tiny amount each time. But the length of time it takes to clear debts in this way is still shocking. It can take 40 years or more to pay back a debt of a few thousand pounds. Credit card companies now put warnings to this effect on their statements but many of us still go from month to month paying the minimum we can.

MBNA is now increasing its minimum repayment amount for the second time in two months. From September it will require some of its customers to pay 5% of their balance. MBNA provides credit cards for Virgin, Alliance & Leicester and numerous affiliated cards for football clubs, other sporting bodies and charities.

In one respect this is good news as it will stop people building up excessive credit card debts. However, it would be much better if the minimum repayment amounts hadn't fallen in the first place! There is also a danger that some people who have set direct debits to automatically make their minimum monthly repayments could be caught out if they don't pay attention to their statements.

More sensible lending policies will benefit us all in the end. Our total credit card debt has already fallen from its peak of £59bn at the end of 2005 to today's level of £56bn. Even more encouragingly, it hasn't risen in the last six months. So despite stories we're turning en masse to credit cards as a last resort means of borrowing, it doesn't appear to be a significant problem at the moment.

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