Page last updated at 23:42 GMT, Tuesday, 27 October 2009

What's the future for credit cards?

Money Talk
David Black
Banking specialist, Defaqto

Credit cards and lock
It is not as easy to lock up a credit card deal as previously

Most of us have got used to having credit cards and take for granted that they provide the easiest accessible form of unsecured credit.

Indeed many people have more than one credit card, with some gathering dust unused.

We already have a two-tier system whereby those with an excellent credit rating can take their pick from the choicest deals available.

As the individual's credit rating deteriorates so will the number of rejected applications, and the competitiveness of the deals available - in terms of both the interest rate charged and the credit limit offered.

Credit quality and risk pricing are certainly the name of the game for providers.

Loyalty

The credit card market does not seem to reward loyalty as the best deals in terms of both 0% introductory offers, and enhanced introductory rewards are routinely reserved for new customers.

This gives those with good credit ratings a clear incentive to change their card on a regular basis and many take advantage of such largesse. Those with poor credit ratings have little opportunity to play this game of musical chairs.

But all is not rosy in the credit card world.

Do not cry for them but things are getting tougher for the providers as they have faced, and are facing, a number of hits on their credit card income streams.

It all started back in August 2006 when a £12 cap was placed on default charges for a customer going over a credit limit, making a late payment, or bouncing a monthly payment.

Since then their income from commission on payment protection insurance has all but dried up and it will be no surprise that they are experiencing increased levels of bad debt in these recessionary times.

Fraud is also proving expensive to them.

The European Union is examining interchange fees.

Meanwhile the Office of Fair Trading (OFT) is looking at credit card cheques, the order of repayment allocation, increasing minimum repayments and limiting the circumstances in which the card companies can increase interest rates charged on existing debt.

All of these are potentially costly to the card providers. Why does this tale of providers' woe matter to us the general public?

By way of analogy think of a balloon: if you squeeze it a bulge will appear elsewhere. Banks generally react in much the same way: if they lose income in one area they will seek to regain it elsewhere.

Credit cards will be no different and to us, the consumers, they look like they are going to become less attractive.

Fees

As we have seen, some charges are capped but others will increase. This has already happened in recent years with balance transfer fees, cash advance fees and overseas usage fees.

David Black
One thing that the credit card will retain is its ability to deal with a crisis
David Black, Defaqto

Dormancy fees have recently been introduced on a couple of credit cards. Interest rates charged may also increase.

Introductory 0% interest offers will become shorter and less available. Reward schemes may be curtailed or become less generous.

It would also be no surprise if annual fees are introduced. If they are it may herald the end of many people having more cards than they actually use as, for many, it would provide the spur to close accounts that are not used.

It may drive the more affluent - those who always pay off their entire balance every month - away from credit cards into greater debit card use.

This exodus could also be hastened if the credit card reward schemes offered dissipate. Against this though, when making payments on the internet, many people prefer to use a credit card than a debit card.

There are however a great number of people who are effectively locked into credit cards because they have balances, or monthly spending needs, that they cannot even hope to clear in the short term, let alone the next few years.

The OFT reported data from the UK Cards Association saying that last year about 14% of people with active credit card accounts - or one out of every three cardholders who regularly used their card for borrowing - had made the minimum payment most months.

One cannot help thinking that we may have already seen the peak of the credit card market. Prepaid cards, debit cards and the likes of PayPal are steadily gaining market share and if the faithful credit card loses some more of their allure the trend may continue.

If someone had told you 30 years ago that the cheque would gradually die out would you have believed them?

One thing that the credit card will retain is its ability to deal with a crisis. When the boiler breaks down or you are hit with an unexpected bill for your car there is little to quickly rival the flexibility of the credit card. There is a market for the credit card but it looks likely to get smaller.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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