Debt -
Credit Card Clampdown And Consumers
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The recent move by credit cards companies to cut the credit limits of their customers is a new twist to the crisis in the financial market. Yet it was not unexpected. With consumer debt growing beyond proportion while lenders grope for funding to meet growing demands for borrowing, it was clear that an exit had to be devised out of the predicament.
In February 2008, Egg shocked its customers by cancelling the credit cards of about 161,000 of them after giving each a notice of 35 days. What was more startling about the verdict was not the withdrawal or cancellation of credit cards, but the fact that even very prudent consumers with excellent credit histories were affected. This provoked questions regarding the motive behind it.
Although Egg said the intent was to weed out high risk consumers, many of those affected, according to reports, claimed they were risk free. Gillian Cox, from Farnham, Surrey and Trevor Smith are examples of customers who said they always paid off their balances each month. But they were, nonetheless, not exempted from the ordeal. Why were they given the same treatment as people who defaulted on credit card repayments, one is tempted to ask?
One theory, according to analysts, is that in the bid to make profit credit card companies consider customers from whom they generate less profit as much a risk as those who default in repayments.
Credit checker, Experian supports this argument as it said banks may in future turn away even better customers as they strive for more profitable business to clear up the mess caused by defaulters. In this case even prudent ones that hardly fail to make repayments but make very modest use of their cards could be affected. A spokesperson for Experian, Peter Brooker buttressed this point saying that those who make very little use of their credits card and pay up at the end of the month may not be considered ideal customers. Perhaps, Egg had a similar thought when it axed the credit cards of customers like Gillian Cox and Trevor Smith, as an expert in the industry suggested.
With more and more customers finding it convenient to pay off their debt and the companies are, by implication, losing interest charges and accompanying fees, it means, therefore, that it is financially unwise to maintain their accounts. This could be Egg’s predicament. Thus, no business would mind removing from its list such customers, who generate no profit.
Another credit card giant, MBNA, also introduced annual charges for customers who hardly use their cards. This is like joining the race to crucify unprofitable customers.
But Egg, in defence of its act said it was no intended to target unprofitable customers. Spokesperson Rachel Roe explained that the decision was not one that was taken lightly, adding that they had carefully considered it in a way that they would not put a dent on innocent customers.
Irrespective of their attempt to make it appear as justified as possible, many of the consumers affected would feel slighted or even mistreated.
Coming soon after the Egg controversial hammer were those from other leading lenders in the UK. Last week, a study by comparison site MoneyExpert.com found that the credit limits of about 1.8 million people had been cut, thus reducing their spending powers. While many of them felt they were treated unfairly by their card issuers, the companies still held on to the high risk avoidance assumption. Consequently, some of the customers saw their credits limits cut by up to £500 or less. And a good numbers of others had between £1000 and £2500 taken off.
As credit crisis continues into next year, as has been predicted, borrowers who rely on credit cards to survive need to realise that the road may be a lot rougher than anyone could predict. This is largely because more card issuers are likely to clampdown on consumers.
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