As the world moves to 0% interest rates and credit card companies hiking up their rates it makes no sense for anyone to keep their cards. Simply arrange a long term loan at the bank at an attractive rate and pay off all cards. Do not be tempted to use your
card until your credit card company offers you a realistic and attractive offer.
In this climate credit card companies should consider their customers very carefully and give plenty of thought to a reduction in their interest rates and charges unless they want to see a flood of pay offs and stagnant usage. They will then have to work
doubly hard to try and attract people back and will face stronger competition as the banks step up their services. It's a bit rich anyway that credit card companies go down a path that takes advantage of the situation. Tax payers are in the mood for change
and more likely to look around and find the most attractive package.
At the same time as motivating credit card companies, the loans from Banks will help bring stability back into the banking industry. The banks have tax payers money sitting on their balance sheet so should be prepared to authorise loans. After all they just
lending back your own money!
Talking of high interest rates, I've never understood the appeal of store cards. Someone was trying to persuade me to have one the other day. Typical APR 20%, they have to be kidding.
This view applies only to those who revolve, of course. Freeloaders (of which there are lots) should NOT cut up their cards.
It should also be noted that there are lots of underlying costs to cards that help to part-justify the rates charged, for instance the processing costs, the cost of funding freeloaders, the high funding costs (LIBOR, not Base Rate) and the higher default
rate that happens at times like this, are just some of the elements...
Also, we aren't just borrowing our own money. Overall card balances are far in excess of the amount of money that will eventually be put into the banks - and don't forget that it's not been invested yet.
But people should be looking to reduce a) the cost of borrowing but also b) their overall level of indebtedness.
Great idea, if only banks were actually lending money at the moment.
Isn't part of the current problem that banks are refusing (or making it incredibly difficult) to lend money.
It is possible that community lenders like Zopa will take up the slack as investors seek those 10% returns. Banks can only pay the current 'attract a deposit' rates while they have someone willing to pay higher a higher interest rate, such as those currently
paid by (non-revolving) credit card users.
It doesn't require much financial acumen for even the average consumer to realise that a person who may be paying 20% on their card balance is going to be a better risk when only paying 12%.
The other issue is one of addiction, it seems the current levels of debt have accumulated over several interest rate highs and lows and upping the rate doesn't cure the patient once they're hooked on a debt-funded lifestyle. Consumers also price items without
adding possible card interest, and even if they do, they are generaly optimistic that they'll pay it off before they get slugged with too much interest. Besides, they probably bought the item on sale and 'saved' already. The outcome is often not in accordance
with their optimism.
There must (or should) be a few banking executives who've tried a Zopa or similar in their research, although I doubt we'll hear about their experiences here.
The community lenders have to draw a fine line between confidence in their business to attract funds and giving enough confidence to their potential competitors to prompt them to enter the market. I'm sure there is more than one bank either planning their
own version or perhaps they've already even built the foundation.
© Finextra Research 2015