Are we paying the price for credit card defaulters?

Many people these days find themselves defaulting on their unsecured debts as a result of strained household finances and rising living costs, but defaulting on debts is nothing new, and has been going on for years.

In the past the cost of missing or even making late credit card repayments was high, with consumers sometimes being charged up to £40 or thereabouts for exceeding the credit limit, missing a repayment, or not making a repayment on time.

However, two years ago all of this changed. The Office of Fair Trading decided that credit card penalty fees were too high, and as a result of this a new regulation was brought in that stopped any credit card provider from charging more than a maximum of £12 per fee.

For many credit card firms this meant massive losses, and many officials were concerned that all credit card users would suffer as a result of these losses. It appears that they were right.

Over the past couple of years credit card fees, charges, and interest rates have rocketed, as the firms try to claw back the lost revenue from the capped penalty charges.

Rather than just those that miss or make late repayments being penalised, it appears that all credit card users are being penalised. Of course, there are still many people that miss repayments or make late repayments, and since the card companies can now charge them no more than £12 it seems that all cardholders are having to pay the price.

One industry official gave an example of how credit card interest rates had rocketed. She said: ‘In April 2006 the average purchase rate on a credit card was 14.9%; today this has jumped to 16.4%. Previously, whereas only a select number of customers were being penalised, now all borrowers are paying the price.

Taking cash out on credit cards has always been an expensive way of borrowing

For any customer who is paying their bill in full each month, the rate increase will have no impact, but with many households struggling with increasing financial pressures, those who only repay the minimum will be hardest hit. Anyone with a balance of £5,000 repaying just 2.5% per month will end up paying an additional £755 in interest from the 1.5% increase in purchase rates.’

She continued: ‘The average interest rate for cash transactions have seen a marked increase from 18.1% to 24.3%. On top of this, the majority of institutions have increased cash advance charges. Previously the majority charged 2%, with a minimum of £2: now the majority charge 3%, with a minimum of £3.’

She also went on to state: ‘Taking cash out on credit cards has always been an expensive way of borrowing, particularly as interest is charged from day one. But with the 6.2 percentage-point increase in the average rate, customers who are relying on cash advances to balance their monthly budget will find a bad situation is now even worse.’

Foreign transaction fees, interest rate hikes, cash transaction and withdrawal charges, and annual fees are just some of the fees and charges that have been hiked up over the past couple of years since the penalty fees were capped.

This situation has been made even worse by the global credit crunch, which has seen the cost of borrowing in general rise, including the cost of borrowing on credit cards.

Another industry official added: “Previously, whereas only a select number of customers were being penalised, now all borrowers are paying the price.”

Research was carried out by Moneyfacts, which showed the various hikes in credit card charges and fees. However, an official from Virgin Money said that the hikes on fees and charges on their cards was not based around recouping losses from capped penalty fees, but was based on their own increasing costs.

The Virgin official said: “We would refute the Moneyfacts findings. We have not made a conscious decision to make up the difference in charges elsewhere. If our charges have gone up it has simply been a case of managing our books because of charges on lending.”

Whilst credit card costs have definitely gone up recently as a result of the credit crunch, there is little doubt that many card companies started hiking up rates following the decision by the OFT to cap penalty fees two years ago.

Consumers that are looking to take out a credit card are advised to do their research thoroughly, and to look at the various costs involved, such as the interest rate charges, cash transaction and withdrawal fees, and if they intend to use the card abroad also look at foreign transaction fees.

It is important for consumers to compare a range of deals from different providers in order to determine which deal offer the best value for money in terms of charges and fees.