Credit card predictions for 2008

The annual report on the credit card market produced by PricewaterhouseCoopers contains some useful pointers as to what may happen in the world of plastic in 2008. To sum it up in a few words, it looks like things could be getting a whole lot tougher for credit card users.

No growth in the credit card market

We’ve been borrowing more and more over the last few years, with total lending growing at over 10% a year and now standing at £1.4 trillion. But most of this is due to the larger mortgages we are taking out. For the last two years, growth in the consumer credit (such as personal loans, hire purchase and credit cards) has been very subdued. Indeed, when it comes to credit cards, the total amount we owe has actually fallen slightly this year and remains at roughly the same level it was back in the summer of 2005. The number of credit cards we have has fallen too, dipping from around 70m to a mere 65m!

So why has growth stalled considering the dizzying array of credit card offers and relentless marketing efforts that accompany them? It appears that Brits may have had their fill of credit cards, and the market has little room left for growth. For example, we’re by far the largest devourers of consumer credit across Europe. We owe about 16% of our gross domestic product (GDP) whereas France, Germany and Spain owe around 8%. Europe’s fifth major economy, Italy, appears to have virtually no appetite for credit owing just 3% of its GDP.

High street spending is still in fashion

The report also shows how debit cards now account for twice as much high street spending as credit cards. Four years ago they accounted for the same proportion. But while credit card spending has hardly grown since then, debit cards appear to be replacing cash for small and medium-sized purchases.

In this regard, the lack of growth in credit card spending is actually quite bizarre. As long as you pay off your balance before it attracts interest, credit cards offer numerous advantages over debit cards. You might be able to benefit from a 0% purchase offer for up to a year, or from a generous cashback scheme. Credit cards also offer protection for purchases over £100 if your goods prove faulty and you’re not able to get redress from the retailer concerned.

Interest rates are falling

The average interest rate charged by credit cards in the UK has fallen over the last seven years, even though base rates are at much the same level as they were in 2000. Average APRs have come down from 19% to 16%. This is still high compared to other forms of borrowing. As Matt Barrett, the ex-boss of Barclays, famously pointed out back in 2003, credit cards shouldn’t really be used for long-term borrowing. But many of us still see them primarily in this light, rather than fulfilling their main functions of facilitating larger purchases and for short-term cash flow management.

Credit card profits are falling too

With APRs falling and no overall growth in the amount we owe, it’s no surprise that credit card profits have fallen sharply in recent years. Additional pressures have come from the Office of Fair Trading’s ruling that charges should be limited to £12 and loss-leading balance transfer offers that are de rigeur for any self-respecting credit card provider.

Bad debts have played their part too, although many in the industry believe the worst is past in this respect. All these factors have seen credit card profitability, measured by what is known as net interest yield, fall from 11% to 2% over the last seven years. This astonishing drop is equivalent to £4b in lost profits, or £130 for each credit card user in the UK.

What does this mean for credit card users?

You won’t be surprised to hear that credit card companies are aiming to get these profits back. We’ve already seen increases in some fees, most notably those for foreign purchases and for cash withdrawals.

It’s likely that we’ll see average APRs creep up again in the near future too. Indeed, we’ve seen this happening recently with some companies increasing APRs for what they perceive to be higher risk cardholders. Expect to see much more of this in 2008, combined with reductions in credit card limits.

A final prediction that the report makes is the return of annual fees for credit cards. These all but died out several years ago but have made a stealthy return on some premium credit cards, where a fee is charged for range of largely useless benefits. It would be a shame to see the credit card market go this way and it would certainly lead to another reduction in the number of credit cards we have in our pockets.