Product category:
Banking / credit / debt
News Release from: uSwitch | Subject: Credit cards
Edited by the Insidemoneytalk Editorial
Team on 08 November 2007
With the credit crunch about to bite,
it's time to put the cards on the table
The credit card market is set to rake in £459 million[1] this year from balance transfers fees alone
Credit card customers have been bombarded with a glut of changes to fees and charges over the past few years Although they appear to be very small tweaks to the terms and conditions which cost individual customers a few pounds, collectively they add up to an extremely lucrative source of income for credit card providers.The money spinning 'stealth charges':Balance Transfer (BT) Fees: All 0% credit cards now levy a fee - it has increased from an average of 0.59%[2] in 2005 to 2.73%[2] in 2007; Cash withdrawal fees: In the last year, providers have made £71 million[3] more from cash withdrawals than they did in 2001 - almost £6 million[11] per month;No caps on BT fees: 96%[4] of BT fees are now unlimited with the average fee having increased from £11.16[5] to £51.65[6] - a 363%[7] increase in costs;0% Deals: Cards offering longer 0% balance transfer periods and shorter interest free purchase periods did not exist 2003
This article was originally published on Insidemoneytalk on 20 Mar 2007 at 8.00am (UK)
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New research from uSwitch.com reveals that British holidaymakers will be charged £355 million when they use their credit cards overseas this year.
Today, they represent 63%[8] of the 0% credit card market ;Negative payment hierarchy: Three out of four credit card providers[9] clear the cash advance last - the most expensive debt.
Just two providers operate a fair order of repayments;BT Frenzy: Two million[10] credit card holders will be taking out their next 0% balance transfer credit card in January, leaving just eight weeks to shop around;uSwitch.com's latest credit card market analysis shows that this year, consumers will fork out a staggering £459 million[1] in balance transfer fees alone.
It also shows that people who have withdrawn cash on their credit cards have lined providers' pockets with a staggering £71 million[2] more this year than they did in 2001, almost £6 million[11] more per month.
Further reading
uSwitch.com comments on the introduction by Morgan Stanley of a fee for Black card customers.
With the end of fee-free credit cards, Morgan Stanley has announced a £20 annual fee for 'a selection' of Black card customers from 1st June.
One year on from OFT's intervention and one in five credit card customers are still not happy
uSwitch.com reveals that nearly seven million credit card customers (21%) are not happy with their existing provider
The OFT's announcement to improve consumer information on credit cards over the next six months
Mike Naylor, Personal Finance Expert at independent online price comparison and switching service uSwitch.com comments:
Many of these changes, or 'stealth charges', are so discreet that consumers may not even be aware that they have happened.
With over two million credit card customers planning to hunt down the next best balance transfer deal in January, now is the time for consumers to brave the maze and put the terms and conditions under the microscope.
The story so far...The introduction of the first balance transfer fee took place around three years ago and marked the beginning of the credit card industry's efforts to recover the £600 million[12] in lost revenue caused by 0% deals.
Inevitably, card providers continued to cast their net wider and profit further from this type of credit card customer.
Ultimately, this has led to: the increase of balance transfer fees and removal of caps; a reduction in the number of credit cards offering equal 0% introductory deals on both balance transfers and new purchases; and the near extinction of 'life of balance' cards.
On top of this, there have been general interest rate increases across both purchase APRs and cash rates and subtle, but costly, tweaks to order of repayments.Mike Naylor, personal finance expert at uSwitch.com, the independent price comparison and switching service, comments: "It's no great surprise that every 0% balance transfer credit card now levies a charge.
Historically, fee free deals fuelled the switching market and marked the birth of the rate tart, quickly turning into a huge financial drain on the industry, to the tune of around £600 million[12].
But let's not be too sympathetic as this is a drop in the ocean compared to the £479 million[1] now generated annually from balance transfer fees, £71 million[3] from cash withdrawal fees and every other 'tweak' to the terms and conditions which generates a small fortune for credit card companies."Providers embrace negative payment hierarchies uSwitch.com research has found that more and more providers have cashed in on a negative payment hierarchy which has become increasingly unfair for consumers.
This means that any repayments are first put towards the cheapest part of the balance on the credit card, with the lowest rate of interest.
There has been a 17.45%[13] increase in the number of providers that repay fees and balance transfers first, followed by purchases and then cash advances.
The most expensive debt, traditionally cash advances, has the highest rate of interest and is conveniently the last to be paid off.
Increased cash advance charges and interest rates;uSwitch.com's findings also reveal an increase in the average cash advance charge from 1.58%[14] (2001) to 2.42%[14] (2007), this has cost the consumer £71 million[3] more in 2007 compared to 2001.
Between 2001-2006 there was a rise of 0.38%[15] (an average of 0.08% per year), however during the period 2006-2007 the charge has increased sharply by 0.46%[16].
Summary of Findings:Balance transfer (BT) fees In May 2005, nearly 30%[17] of credit cards carried a BT fee - now they all do.Fees have increased from an average of 0.59%[2] in May 2005 to 2.73%[2] today.Caps on BT fees; Today, the majority (over 96%)[18] of credit cards no longer have an upper limit.Decline in combined 0% offers on balance transfers and purchases for the same period In 2003, all providers offered this type of deal, now just 37%[19] of providers do.0% deals for 5 months on both purchases and transfers have been the greatest casualty.
They made up 41%[20] of the market in 2003 and now represent just 8%[21].Cards with longer interest free balance transfer deals and shorter interest free purchase periods were non-existent in 2003 but now represent 63%[22] of the 0% credit card market.
The most prevalent deal of this kind is now 0% on balance transfers for 12 months and 0% on purchases for 3 months, offered by 44%[23] of providers.
This type of card will certainly catch consumers out if they do not understand the complex order of repayment rules.
Near extinction of life of balance transfer cards These cards peaked in 2005 accounting for 13.4%[24] of the market, gradually declining to an all time low of just 5.74%[24] today.Naylor continues: "The credit crunch could well become a harsh reality in January when two million[10] balance transfer customers try to carry out their next switch.
A large number of customers may not be able to get another 0% deal and end up stuck with their existing provider, paying the an average APR of 16.52%.
There is some evidence that lenders have tightened up their lending criteria in the mortgage market already and providers such as Barclaycard[25] have recently reduced half a million credit limits for existing customers and rejected more than half of its new applicants.
With only eight weeks to go until the New Year, we urge customers to shop around now to ensure they get the best deal."Naylor's top tips for credit crunch victims:Balance transfer credit cards: Still good value for money but consumers should be prepared to pay a fee of £300 over three years on balance transfer costs on a balance of £5,000 (based on a 3% fee).
This is totally dependent on being accepted for three 12 month 0% balance transfer deals.
Unsecured personal loans: Consolidating debts with a loan is also an option.
On the same £5,000 debt, repaid over three years, consumers would pay £504.76 in interest on a typical APR of 6.5%.
This offers peace of mind with a fixed interest rate and fixed monthly repayments.Life of balance credit cards: A life of balance card is also an option.
There are seven cards available at an average rate of 5.74%.
This will stamp out the ongoing cost of BT fees as these cards do not levy this charge.Pays to switch: Transferring £3,000 from a credit card with a typical APR of 15.9% to a 13 month 0% balance transfer card (3% BT fee), could save a consumer £396 in interest in just 18 months.Best 0% BT credit card: Virgin Money, 0% for 15 months.Best 0% credit card for new purchases: Halifax MasterCard, 0% for 15 months.Best cash-back credit card: American Express Platinum Moneyback, 5% for three months, between 0.5% to 1.5% thereafter.Naylor concludes: "The credit card industry will never be stagnant.
With the glut of changes that have taken place over the past few years, most of which have not been in the consumers' best interest, managing your finances effectively cannot be viewed as a spectator sport.
There are still a lot of great deals out there, but consumers need to be willing to invest time in shopping around to make great savings.".
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