Credit card debt is soaring, and the range of cards on offer is also expanding exponentially. But card providers are becoming increasingly wary of so-called “rate tarts”, who shift their debt frequently between providers to take advantage of introductory “zero per cent” deals.
Unsecured consumer credit outstanding reached £183.6bn in 2004, according to the Bank of England, with credit card debt making up about a third of that figure, or about £59bn.
Just 12 years ago credit card debt amounted to a mere £10.7bn.
Although the rise in credit card debt reflects the overall surge in consumer borrowing now above £1,000bn there is a more positive spin to be put on the increase. Consumers are now able to access much better deals on credit cards than they were in the past and are shopping around to get the best rates.
Websites such as www.uswitch.com or www.moneyfacts.co.uk allow potential customers to compare a wide range of zero per cent offers from credit card providers. Judging by appearances, lenders are still keen to attract new borrowers this way. “Zero per cent deals are here to stay,” says Andy Deller, director of banking at Egg. “Far from lenders moving away from zero per cent deals, more lenders are entering the market.”
But others think the days of the zero per cent deal are numbered. “This is not sustainable,” says David Newman, director of marketing management at Co-operative Financial Services, which owns Smile. “Providers are trying to offer simpler products which offer a fair rate for the life of the credit card [rather than a zero introductory rate].”
Newman believes that between 50 and 80 per cent of customers either repay their outstanding balance at the end of their introductory zero per cent period or move on to another zero per cent deal on another card and that increasingly savvy customers are willing to switch between different forms of borrowing credit cards, personal loans and mortgages to find the best deal.
He says that providers are also adding “hidden nasties” to their zero per cent deals, such as balance transfer fees, which should make them less appealing to consumers. It certainly makes it more difficult for them to choose between them. Newman says he expects an increasing number of card issuers to add fees to previously free services such as balance transfers, and that others who still allow free balance transfers set minimum spend limits, with fees attached if these are not met.
“Actions are clearly being taken by other lenders to dissuade committed switchers,” says Deller. “Barclaycard, MBNA and Mint have all introduced balance transfer fees.”
Helen Saxon, of the Consumer Credit Counselling Service (CCCS), says that, while zero per cent offers are a great deal for consumers, the ease with which they can sign up to them is a cause for concern.
“Every major lender will go through credit reference agencies, but lots of banks and credit card providers only share default rates rather than all information like minimum repayment behaviour,” she says.
Newman agrees that a lack of information may mean that a borrower can obtain credit too easily. “We don't have the whole story,” he says. “We might not know if someone is struggling with a large mortgage.” It is a lack of information which has had tragic consequences. According to the CCCS, some borrowers have been driven to suicide by unmanageable credit card debt.
It cites the example of Richard Cullen, a self-employed mechanic from Wiltshire, who killed himself last month after building up a debt of £130,000 on 22 credit cards. Until just before his death, according to the CCCS, he had been using one card to pay off another, so no problems were reported on his accounts until events had gone beyond his control.
The CCCS says that his is not an isolated case. It has one client in its database, for example, who had 48 credit cards.
Many stressed borrowers, and in particular the committed switchers or “rate tarts”, do not actually default on their credit card debt. Instead they merely make the minimum payment each month. This information, which gives a real indication of whether someone's debt is getting on top of them, is not shared between card providers.
“Each case of extreme debt highlights the urgent need for more data sharing between credit card providers,” says the CCCS. “Many providers only inform credit reference agencies when a customer has defaulted on the minimum payment for three consecutive months.”
Deller says: “We don't release the number of Egg card customers who are in default and the number just repaying the minimum payment, as these figures are deemed commercially sensitive.” Co-Operative bank is one of the few that share so-called “white” information with the rest of the industry. White information covers monthly payment information, credit limits and default payments.
“On the question of minimum repayment information we are supporting Apacs [the Association for Payment Clearing Services] who are currently investigating whether or not sharing such information would be practically possible and indeed useful,” says Newman.
