Are credit card companies giving good payers a good deal?

Over recent months there has been a lot of speculation as to why many credit card providers and banks are taking action against customers, with many raising their interest rates by a significant amount despite the two recent interest rate cuts by the Bank of England, and some even withdrawing credit card facilities altogether.

Whilst credit cards have been at the centre of controversy for many years due to their ability to add to consumer debt levels, it is only over recent weeks that speculation over whether credit card companies are penalising the wrong people has emerged.

The speculation over the real reasons behind credit card companies penalising its customers emerged after the Internet lending giant Egg withdrew the credit card facilities of 161,000 customers earlier this year.

At the time, Egg stated: “We are sorry some customers are upset after receiving notification we are ending their credit card arrangement, but they are people we do not feel it is appropriate to lend any money to.”

He added: “The decision was taken after an extensive one-off review of our credit card book following acquisition by Citigroup.”

However, it soon emerged that many of the customers that had been on the lender’s hit list had not got bad credit ratings and had not missed any repayments on their credit cards.

This quickly fueled speculation that the real reason behind Egg’s decision was not to try and avoid bad debt thought lending to those that were high risk, but to try and improve their profits by getting rid of customers who were good payers and therefore did not generate much income in terms of charges, fees, and interest rates.

Following the Egg decision John McFall from the Treasury Select Committee stated: “Are we witnessing a situation where credit card companies are taking cards away from perfectly safe customers who pay their bill in full every month on the same date for years - and giving it to customers who are riskier? And if they are doing so, then their methods have to be called into question.”

The decision by Egg and by other credit card companies that have made moves to increase rates on cards or withdraw facilities has been defended by some industry officials.

One official from APACS said: “A credit card company is a business and it will always be looking to do one of two things: either making sure that it’s lending money responsibly to people who can afford to repay any money that they’re borrowing, and secondly, as a business that needs to make a profit, deciding whether it wants to give you and I a card.”

More recently the Halifax has raised the interest rates on many customers’ credit cards by a significant amount, and this has left many people paying up to 5% more interest on their credit card balances.

However, whilst many of those affect may be people that have not missed any repayments on their cards and have a decent credit rating, it was revealed that the bank is taking action in cases where the consumer has been a long standing customers and has a good record.

One customers recently explained that the Halifax hiked up his interest rate from 10.9% to 15.9% and he had never missed a repayment and had been a customer with the bank for eight years. He called the Halifax to find out what was going on, and the bank agreed to revert his rate to the original lower rate given the circumstances.

Following Egg’s recent credit card cancellation Labour MP Nigel Griffiths arranged a meeting with the chief executive of Egg, and said that he wanted an apology from the lender for those customers that had been affected.

He said at the time: “Egg has got a lot of explaining to do. If you want to get rid of customers who are not bad credit risks but who you just don’t make money out of, then you should make a charge for your card.”

He added: “Egg’s job now is to prove they have an honest intention in this. They made a mistake, we need an apology and compensation for wasted credit agency checks.”

However, even following the meeting Egg refused to budge on its decision, and the customers that were on the hit list ended up having their credit card accounts cancelled.

Nigel Griffiths expressed his opinion on how ridiculous the decision was in some consumers’ cases, explaining: “One letter I received was from someone in the City who said last year he made £1m, he has £100,000 worth of shares in Citibank group that owns Egg, and he’s absolutely outraged that he should be told he is any sort of credit risk.”