The credit crunch is a little different to previous incarnations of economic slowdowns in that it has hit the consumer much harder and much earlier on in its development. The amount of personal borrowing against credit cards and the lenders' response to this particular crisis may have a great deal to do with that early-doors impact. A survey by the financial information analysts Moneyfacts has found that at least 10% of credit cards have raised their interest rates or fees as a direct result of the economic storm now battering UK PLC.
As a consequence, the average APR on credit cards has risen from 16.8% to 17.2% in just over three months. This upward trend is a direct counter to the Bank of England's 1.5% recent base rate cut, which brought the base rate down to 3% in an attempt to cool the prospect of rising inflation. This particular credit crunch is biting hard across the board. The slush fund banks use to lend to each other is running dry and this time consumers are feeling the squeeze as well. As a result consumer spending has dropped markedly meaning that even less money goes into the economy, perpetuating the situation. In lender's eyes, this lack of available cash means that customers pose a greater risk to the credit card companies due to the increased chance of defaulting on payments. But rather than just shoring up via interest charges, lenders are being much more proactive this time to try to stabilise the market for everyone.
As the dominoes started to fall in the banking industry, lenders lost faith with their former partners and in their customers' ability to pay back loans and credit card debts. The system relies on continuous injections of consumer cash in the form of interest payments to keep working. As borrowing from other financial institutions has become much harder, the only way for lenders to raise capital is to increase the interest charges on credit cards, loans, credit agreements and mortgages. This ground-shift signifies an end to the 'live now, pay later' mentality of the 1980's and 1990's. The good times really could be over - for a short time, anyway. But by readjusting their positions, the lenders may actually be doing the right thing, and not giving in to 'quick fix' solutions like rate cuts. A more pragmatic approach to the system means that credit cards still offer great deals - they're just a little more careful to avoid lending to customers that may already have problems.
The ten years between 1997 and 2007 were boom times for credit card lenders in the UK. The brakes weren't just put on because of the credit crunch that kicked in during 2008. An extremely competitive marketplace, the emergence of the Pacific Rim countries as manufacturing and financial superpowers, increasing international 'bad debts' and a plethora of government regulations made the credit companies re-evaluate their positions. A few companies responded with a knee-jerk reaction of 'dumping' thousands of customers that were just not profitable (those who cleared their balances every month and paid little or no interest charges). All of the credit companies tightened their criteria for lending, increasing transfer charges, restricting credit limits and access to cash withdrawals. By doing this, they're not only minimising their own exposure to bad debt, but reducing the possibility of their customers getting into trouble as well. It's a win/win move by the credit card companies, and will probably do a lot more to help stabilise the market.
The credit card industry has been hit twice. The loss of the overall market share several years before resulted in a clamour for customers, with 0% balance transfers acting as financial carrots to customers wanting to reduce their interest payments on outstanding balances. Cards are now shifting towards a policy of charging up to 3% balance transfer fees to try to pull back some of the lost profit that the 0% offers cost them. The second blow was the Office of Fair Trading's decision in 2006 to cap penalty charges to 12. Now cards are lining up for another bureaucratic blow as the Complaint's Commission takes a closer look at the personal protection insurance schemes that often accompany credit card deals.
The continuing economic slowdown could really start to impact on jobs in the next 12 months, with unemployment set to climb. This is making the credit card lenders even more nervous, as the prospect of more people defaulting on their payments because of the loss of primary income increases the card lender's exposure to more 'bad debt' risk. All of this seems to imply that the era of the friend in your wallet is over, but that's not strictly true. What has happened is a readjustment of the marketplace, making it more stable for lenders and borrowers to maintain a safe position. Credit cards may have stricter approval criteria than in the boom times of the 1990's, but it also means that a more responsible approach to lending has been adopted, and that can only be a good thing.

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