Credit Card Fees On The Rise

Interest Rate Rise

As lenders continue to fight rising bad debts, consumers will eventually carry the cost through a rise in rates and fees. Funding constrictions and the lack of borrowing is also having an impact on lender costs.

The rise in regulations and government scrutiny is shaking up the market to the point were by the current fee-free model on credit cards may be unsustainable.

“Lenders will be unable or unwilling to increase supply sufficiently to match demand. This will leave consumers surprised at both the cost of credit and the difficulty in gaining access to it,” PricewaterhouseCoopers partner Richard Thompson said.

The UK, the only European country with more credit cards per head than population, has seen a drop in borrowing of 3% in the past year as consumers cut back and banks continue with restrictions.

Despite this lenders are still left with rising bad debts.

Impaired loans hit 6 percent of outstanding balances and could rise to 9 percent by the end of 2010, PwC said.

“This would have enormous implications for the profitability of credit cards in the UK market. Large-scale change within the sector over the next few years is inevitable,” Thompson said.

PwC predict that lenders will scrap the current credit card business model, that premium lenders will see a rise in fees and that lower spending consumers will have to pay for the privilege of holding on to a card.

Lenders will also reposition cards, tapping innovations such as contact-less payment, pre-paid cards and payments by mobile phone, PwC said.

The chief executive of Barclaycard has warned that changes in technology could see plastic cards phased out within the next 3 years. Barclaycard are currently investigating contact-less cards.

The government, competition authorities and regulators are all putting the industry under further pressure. The government are currently looking at credit and store card issues including higher minimum payments to pay balances of faster and a ban on unsolicited increases in credit limits.

Based on discussions with issuers grappling with the U.S. Credit Card Act, PwC said the outcome would be higher costs.

“With the UK credit card business model already under significant pressure, any further measures to restrict issuers could increase the cost of credit cards to consumers and reduce their availability to certain segments of the market,” it said.

PwC also said that it anticipated lenders trying to liquidate assets through portfolio sales and buyers returning to the market lured by attractive discounts.

The government has stated that they would like to see more competition in retail banking and they are expected to support new lenders moving in to this market.

Regulators have already reported a number of applications for new banking licenses,
including Virgin Money as mentioned a few weeks ago here.

With the expected rise in credit card fees, rates and minimum payments isn’t it time you consolidated your loan? Complete the short form on the right and cut your monthly payments and start saving on costs today.

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