We all know mortgages are harder to come by since it dawned on the financial industry that their natty way to finance their business was suicidal, but that £1 trillion of personal unsecured debt is now the perfect way for finance companies to make money. Credit is crunching.
Would You Credit It?
I am talking about yesterday's report in the Telegraph business section which highlighted what frankly what we ought to know but it's still pretty shocking. While the Bank of England's base interest rate has fallen to the lowest level in its 300+ year history of just 1.5%, the Annual Percentage Rate (APR) on one credit card is up to 46%.
That particular beast of a card is the perhaps not a surprise one - it's the British Airways American Express Card, no doubt a prize possession of much travelled Bankers, Partners and Lawyers. To add to the cache of the card, its Annual Fee on the Premium Card has just risen from £120 to £150 just in case you should clear the balance regularly. Altogether, it is the most expensive card on the market (no I didn't mean say it altogether, I meant - oh, please yourself).
For the mathematicians amongst us, that APR rate is over 30 times the base lending rate - a nice profit in tough times for sure (must send a note to the LinkedIn Discussion at IOD on businesses booming in a Recession).
But BA Amex is not alone - the Northern Bank NI Platinum MasterCard charges a whopping 42% APR and a £200 annual fee, Citi's Ultima MasterCard is 41% APR and £300 annual fee, the Vanquis Bank (who are they?) Visa is 39% APR and no fee and (Oh no, not after yesterday's article on Virgin Trains) Virgin Money's Atlantic Black Amex is 37% APR and £115 annual fee.
There's Lots of Money in Plastic
The BA Amex Card has been singled out by Which? as leading the nasty stakes when it comes to credit cards and even dwarfs the kinds of APR charged by cards like Vanquis which aims its high interest rates at those with the worst record of payment performance (there is a perverse logic in banking which says make those who can't pay, pay more because no on else will lend to them). The nasty BA Amex card is generally used by frequent flyer types and the benefit is 1.5 air miles for each £1 spent on the card, a free companion flight when air miles are redeemed and a limit of £10,000 per year (why limit it with that kind of interest rate?).
Naturally BA say Amex set the rates and it isn't their fault that their chosen partner charges the highest rate on the market and is therefore not their concern. As an aside, comparing recent flight costs to Italy, compared to Alitalia in every instance BA were more than double the cost and this concurs with an 'insider' I spoke with at BA who tells me that it is BA's deliberate strategy in a downturn to charge significantly more for their flights while nearly all other airlines have adopted the strategy of lowering prices, usually temporarily. The perverse logic here is that BA own a significant proportion of the routes available and so travellers HAVE to use them in a large proportion of instances and especially businesses where BA have been mandated as preferred airline or of course those Frequent Business Fliers who ask their Travel Company for BA only as they get the Air Miles and Executive Club status as perks.
But BA Amex are not the only culprits - a study of 240 credit cards by Defaqto shows that the average APR on cards climbed from 17.2% to 17.6% in the six months to November 2008 - a period when underlying interest rates were falling at unprecedented levels.
To Point Out
The nasty cards pointed out by Which?, with the exception of Virgin Money which frankly has no excuse (and I have a card with them I paid off last year when it got very expensive), are almost all at the high end or aimed at bad credit risks. The logic says that snooty banking types can't have a flash car and job without a cache credit card that looks gold, platinum or jet black when they brandish it to buy their round at the Champagne Bar. Meanwhile, those who cannot afford to buy anything are charged extortionate fees as they are assumed to be so desperate they would pay anything. Loan sharks, we are told, are rolling up so much fees, penalties and interest rates that some poor people in real debt trouble are being charged 10,000% on their debts - and these credit cards only add to the agony and hopelessness of a situation.
While the snooty types can fend for themselves, why on earth do we allow companies to operate that can charge such high APR rates, particularly to people they already know cannot afford it?
Of course, credit cards make money at both ends of the spectrum. They charge the retailers a percentage of the sale value for effectively offering finance to the customer and depending on the card type it can be 2% or more but generally around 1.5% of the purchase price (including VAT of course). So these companies are raking it in.
It is also fair to say that the proliferation of cards is curious as many firms, like BA, offer cards which just bear their name. Beneath lurks the co-conspirators like Amex or in Virgin's general case the MBNA Bank who have a great reputation for high charges and poor service - or at least in my house they do.
Conclusions
Unsecured credit card debt is a licence to print money.
The providers are raking it in. In the case of BA and Amex, it is a cosy relationship where Amex can target specific high end net worth individuals who use credit cards very regularly on travel to buy travel and expensive goods and so can afford high costs of credit and are willing to pay for cache. While BA 'sells' this customer list to Amex for a nice return on the transactions and I dare say a share in the interest payments. Each can divorce themselves from the other at the consumer end as per the article when reporters go snooping.
Credit cards again appear to have a lack of regulation and control. While general interest rates fall, credit card average APRs go up. Part of this is that there is increased risk as this is unsecured debt and there is no longer the equity flying around to cover it if it can't be repaid and part of it is that it's easy to charge more because no one will stop them. Also, with increased protection being offered by the Government for people with smaller debts to get them written off, individual credit cards are coming into the firing line as they rarely offer greater than £5,000 to £10,000 credit limit per card - this means the new protection system for debts of £15,000 or less may force credit card companies to have to start writing off more bad debt in the future. Hence higher credit costs again.
The long and the short of it is that it comes back to spending our way out of a recession. There is a big risk that unsecured credit will rise if we follow the Brown/Darling/Keynes approach as we spend beyond our means and have no equity in our homes to cover it. The best advice surely is to consolidate and try and bring this debt down as servicing it is eating into our monthly disposable income at an increasing rate despite interest rates coming down.
I'm no financial expert but surely that makes sense?
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