Cheap credit card deals still available
Posted in 'Personal Finance' by Richard Catlin
22 October 2008
Banks may be very reluctant to lend to each other, but credit card companies continue to compete aggressively for your business. We’ve seen record numbers of people using our free credit card finding services over recent months. Surprisingly, given the relentlessly gloomy financial news, we have had hardly any customers report to us that they have been turned down for credit.
We have highlighted elsewhere the remarkable 5% cashback offered by American Express, and even the troubled Halifax is offering its All in One card with an exceptional deal which includes 0% fixed on balance transfers and purchases for 10 months. There are at least six cards offering interest rate APRs of 12.9% or less at the moment, according to our sister website givemecredit.com.
The reasons for the continued appetite of credit card lenders to issue cards are:
- The only cards that are truly profitable for lenders are those used by ‘extended credit takers’. Customers who pay in full each month - ‘full payers’ - are not very attractive to card providers. If a credit card company can increase the number of extended credit takers it has on its books, it makes more profit.
- By offering balance transfers at a reduced or 0% rate, the credit card company takes on a potentially interest- generating balance without having to pay retailers any fees (‘merchant service charges’). Some even charge cardholders around 3% for balance transfers. Longer term, the card company can attract more extended credit takers this way.
- Cards like American Express aren’t accepted as widely as Visa or MasterCard, but by offering high cashback rewards for almost 10 years now, they have made substantial inroads into gaining new retailers. Many savvy customers use their American Express Platinum Cash Back cards where they can, and a Visa or MasterCard Cash Back card, such as Egg, to get cashback on selected retailers.
- Card lenders must continue to lend to keep their arrears levels in check. By lending continuously, new cards, which tend to perform well above average for at least the first 5 months, will dilute the overall bad debt percentage. If a card lender stops lending, bad debt (‘delinquency’) will rise quickly – not a good thing to happen to a bank in the current financial marketplace and where regulators will be monitoring ‘delinquency levels’ carefully.
But things may well change as a recession bites.
First, card lenders will cut down on marketing spend. Their appetite will still be there, the cost of acquiring a credit card (estimated at over £200 per new customer) will be reduced significantly, but the public at large will be less aware of the choices available as postal mailings and emailings subside.
Second, it’s likely that some card companies will become much more choosy. They will be more focussed. Firstly, on targeting extended credit takers, and secondly on risk. From our observations, so far only Capital One has changed its risk appetite and has heightened the credit score hurdle for new applications, and that was done over a year ago. In February this year, Egg has also made a controversial move to withdraw cards from 161,000 established customers which its new owner regarded as carrying ‘unacceptably high risk’.
In the US, many credit card companies have started to reduce credit limits, mostly on dormant cards to reduce unutilised credit limits, but also on active cards. As many US card issuers operate in the UK, it’s a fair bet that the same thinking will be applied to their UK operations at the appropriate time.
Our advice is simple.
Check what APR you are paying on the card that you use most. If it exceeds 14.9%, you should switch to save money now, using our free credit finding services.
If you are in the habit of using a debit card, stop right now. Use a credit card to get protection against retailer failure, and to earn cashback.
Our free credit finding services are available here.
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