Could credit card borrowing get even tougher?

Posted in 'Credit Crunch' by Richard Catlin

24 November 2009

It has been evident for some time that credit card providers haven’t got much of an appetite for new customers, and it now seems that getting a new card in the future could prove even more of a challenge.

A combination of tightened acceptance criteria and a concerted effort by consumers to clear their credit card balances saw overall ‘plastic’ debt fall for the third consecutive month in September. Despite this reduction and promising noises about the UK beginning to emerge from the recession, the amount of debt that credit card providers are forced to write-off as ‘unrecoverable’ is predicted to rise significantly next year.

The amount of borrowing that lenders are forced to write off as unrecoverable - known as charge-offs - has traditionally been a relatively small number: less than 1%. However, the delinquency rate (the number of customers at least 90 days in arrears) has increased sharply and is expected to reach a peak in 2010.

Should this happen, it’s likely to bring with it a fresh batch of problems for consumers. Capital One announced this week that it was increasing interest rates for some of its 4 million UK card holders to 39.9% - just in time for Christmas - a 7% increase.

Capital One blames ..."the increased risk of lending in an economic downturn", and says that its rate increases meet the guidelines laid out by the Government earlier this year. It’s just the latest in a long list of rate increases by card providers in the last year or so.

UK consumers have traditionally enjoyed being one of the few countries where credit cards and current accounts come without a monthly fee, but as lenders look to claw back any losses from defaulted accounts, one solution is simply to increase the cost of borrowing for all consumers, in the form of an account management fee.

Unlike the irresponsible mortgage lending that started it all, the rising default rate on credit cards is largely due to consumers simply struggling to make ends meet. This new threat to bank profitability could change the face of credit card borrowing completely.

Consumers have found it increasingly difficult to service existing debts at the same time that competitive offers on new cards have become harder to obtain - as lenders focus on existing customers rather than looking to recruit new ones.

With all the signs indicating that getting a credit card might get tougher before it gets easier, it’s important to do everything you can to maximise your chance of success. Applying to lenders who match your credit score is a great start, and you’re much more likely to find one that says "yes". You can see which lenders are matched to your credit score for free here.

If you’ve already had an application rejected, it might be a good idea to check how your credit file would look to a lender if they were to check today to make sure that everything is as it should be. You can check what is held about you at any one of the UK’s credit reference agencies, or all three together, with checkmyfile.

Check your credit report.