Good Credit Card Holders Face Penalties

In a desperate attempt to claw back some profit, credit card companies are targeting low risk customers. The companies are reeling as they need to recover millions of pounds in lost revenue and bad debts after the regulator imposed limits on penalty fees.

As a result, last year 2.5 million credit card holders were affected, with new fees charged, accounts closed and spending limits reduced.

Of these 2.5 million customers, only 16 per cent were classed as bad customers, borrowers who had missed a payment or exceeded their credit limit. The other 84 per cent, some 2.1 million people, were low risk customers who always paid at least the minimum each month.

Many customers hit with new fees and changes to their account actually paid off the full amount owing each month, while over half paid more than the minimum repayments each month.

Uswitch, the credit comparison site which carried out the research say that “credit card providers are taking drastic action to manage bad debt.The question is whether providers are simply trying to reduce risk and indebtedness, or whether they are just trying to filter out less profitable customers.”

Head of personal finance at uSwitch.com, Simeon Linstead, says: “We’re not against credit cards providers curbing consumers’ spending if their debts are genuinely getting out of hand. However, credit card companies who are taking action to close down or make changes to customers’ accounts must be completely open about how and why they have selected those customers.”

APACs, the industry body that regulates credit cards firms reports that of 31 million credit card accounts held, 21.4 million are paid off in full regularly or always.

Mr Linstead said: “These customers are the least profitable for a credit card company to have on its books unless they withdraw cash, use their card overseas or get caught out by the order of repayments. They will not be contributing much to the £6.186 billion in interest made by the credit card industry last year.”

Credit cards are increasingly being used to pay household bills, a fact that many experts find worrying. High street retailers are particularly concerned that spending has reached a three year low, most likely due to reduced lending and further diminished as customers use their credit cards for more mundane purposes as they struggle to pay the bills.

Payday loans have also seen a massive boom as people are incresingly finding that their paycheck will not last the whole month. Household expenses have risen dramatically, with the average family epected to spend £1000 more on groceries this year then last year, making payday loans an attractive or sometimes necessary option.

MoneySupermarket, another price comparison site has seen a 55% rise in the amount of people taking out payday loans since last September, when the credit crunch hit.

Payday loans have a maximum 30 day term and a typical interest rate of 25 per cent. Tim Moss, head of loans at MoneySupermarket urges borrowers to avoid payday loans.

He said: “The rise in payday loans symbolises just how difficult people are finding it to cope, as disposable income is being squeezed through increases in the cost of food, fuel, utilities and general living necessities. “

“However, they should only be taken out when it's absolutely necessary and you are sure you can pay it back quickly. Anyone looking for longer term credit or unable to pay off the debt immediately, should steer clear.”

Carys is an author of several articles pertaining to Credit Cards. He is known for his expertise on the subject and on other Business and Finance related articles.