Credit card companies still chase new business (From The Northern Echo)

Credit card companies still chase new business

10:03am Tuesday 7th September 2010 in

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ALTHOUGH credit card companies are writing off bad debts at record levels – Bank of England figures show £2.1bn was lost this way between April and June, which works out at about £40m a day – they still chase new business with offers on cards and personal loans.

However, this is not as contradictory as it might appear.

Tim Moss, loans expert at finance website Moneysupermarket.

com, said: “To keep a Triple A credit rating, lenders must hold bad debts at a certain level.”

Many would-be borrowers are in a vicious circle. As bad debts rise, lenders bump up borrowing costs for new customers.

Despite a rock bottom Bank base rate, the average personal loan rate is about 12.6 per cent, the average overdraft rate tops 18 per cent.

But to minimise risks, the majority of High Street lenders deal only with existing customers.

Nationwide BS says its “market leading” 7.7 per cent personal loan for amounts between £7,500 and £14,999 for up to five years coincides with the September car-buying season.

However, it is only available to existing – or new – Nationwide FlexAccount customers, which is a limited slice of the adult population.

Credit card providers are using a different strategy.

They devise products to ease the pain of being in the red.

Andrew Hagger, at Money net.co.uk, said: “A 15 or 16 month interest-free period on balance transfers is becoming commonplace, although good credit ratings are essential for a successful application.”

He said MBNA’s new Platinum credit card, for example, “could buy crucial time for someone determined to get their problems sorted in that time”.

The eye-catching feature of the MBNA card is the promise of no handling fees on balance transfers or money transfers made within the first 90 days of the account being opened.

More importantly, a promotional rate of only 1.9 per cent applies for 12 months on money transfers, while the standard rate of interest on card purchases is 16.9 per cent (typical) APR.

Obviously, any money transfer will be limited by a customer’s personal circumstances.

For the introductory first year, the rate is only 1.9 per cent.

At the end of the promotional period, the rate on money transfer balances costs between 20.9 per cent and 27.9 per cent, depending on circumstances and credit history.

That easily tops many authorised overdrafts, including Nationwide BS (18.9 per cent), Lloyds TSB (19.3 per cent) and HSBC (19.9 per cent), making the MBNA option essentially an interim option.

Will Curley, product executive for MBNA in the UK, said: “This product appeals to many customers, particularly those keen to pay debts over a short period with lower fees.”

Mr Hagger said: “While interest- free deals allowing you to switch balances from one piece of plastic to another are nearly ten a penny, the option to use a balance transfer to clear non-card debts is a rare opportunity to save on loan or overdraft interest. A £2,500 personal loan could set you back £272.96 in interest in 12 months or an overdraft of the same size almost £500.

“Borrowing this sum from MBNA at 1.9 per cent for 12 months costs £47.50 interest.

“If you’re smart, you’ll clear your balance or at least made inroads in the promotional period. If you don’t, you’re exactly the sort of profitable customer that credit card providers dream of.”

From September 1, repayments to the AA’s Reward Credit Card that do not pay off the full balance will pay off balances charged at the highest interest rate first.

The typical charge for the AA Reward Credit Card is 18.9 per cent, and this new plan means balances with lower interest rates, such as the current online 12-month introductory zero per cent on purchases, will be paid off last.

The AA Credit Card also offers a reward scheme targeted at motorists.