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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A more sensible borrowing policy by the consumer would also help. Increasing the minimum repayment % should help. 10% or higher would be a start. But there is little incentive on the banks to do any more when many consumers appear willing to pay anything upwards of 15% to them for the dubious benefit of bringing forward purchases.[br/][br/]Credit cards are a great financial aid. Pay off the balance each month; keep a card for that emergency payment. But not as a way of supplementing your salary. [br/][br/]And when are we going to take a pride in understanding the financial world. It is depressing that so many of us who buy and use technology of such technical complexity can't add up and don't understand the rudiments of budgeting or have basic financial skills. [br/][br/]By not having those simple skills the consumer hands over responsibility for their financial well being to others. The individual consumer loses control of their finances to be buffeted and battered by any financial squall or storm. [br/][br/]I blame business, for their voracious appetite for profit. I blame government for their inability to inculcate a sense of responsibility in the consumer. But most of all I blame us, the consumer, for our gullibility in believing we can have it all painlessly and without cost.
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It is not that the purchase rates just increase; they positively make a giant leap in some cases. I had a balance on Virgin card which I was paying off month by month, no arrears anywhere, no problems of any kind in the past. Suddenly one month the interest rate went from around 15% to 30.9%. And Virgin did their most to try to burry this little gem of the news among others. I was informed in a small print at the bottom of the bill which I did not notice until the following month and then only because the minimum payment taken by direct debit was lower than the interest charged. I do top up the minimum with variable amounts every month, depending on expenses, but without this it would not take 40 years but for ever to repay the debt. [br/]As I consider the rate of 30.9% unethical highway robbery I applied for another card, got 0% transfer and cancelled the Virgin card. But with my luck and naivety I happened to choose MBNA to be the proverbial knight in shining armour. I did not then realise that they own Virgin card. Two or three months after the transfer I got a letter from MBNA stating that after my 0% rate period is finished, the interest rate will go not to 15.9% as previously advertised, but to ...yes, you guessed it 30.9%. Well, after the special rate finishes I will be cancelling the MBNA card too. [br/]I also decided that one cannot trust Virgin brand and will be staying clear of any other Virgin products. The initial offer may be good but who knows what ideas have dreamed up for afterwards
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16 July 2008