Credit card rates expected to soar

November 13, 2006

Recent research carried out by Price Waterhouse Coopers, who provide focused assurance, tax and advisory services, has revealed fears that credit card companies and banks will have to raise credit card interest rates or start applying annual fees to compensate for loss of profits over the previous twelve months.

With credit card margins falling and with the loss of over £1 billion due to increased consumer protection policies, Price Waterhouse Coopers (PWC) believe banks and credit card companies could reintroduce an annual fee to cardholders. Due to increased competition between card suppliers and healthier margins, most annual fees were dropped in the 1990's.

PWC calculate that consumers would need to be charged an annual fee of around £35 to compensate for the loss of £1 billion.

More ominous is the threat of interest rate increases. PWC state that we could see credit card interest rates rise by as 2 per cent on average.

Other points of interest were:

• Loyalty schemes are the single most important factor when consumers choose a credit card
• UK consumers have overtaken the US in terms of debt penetration
• Debit card spending has surpassed cash for the first time in 2005

Richard Thompson, partner at PricewaterhouseCoopers LLP, said, "With fierce competition and rising bad debts already hitting issuers, it’s hard to see how the banks will absorb £1 billion of lost revenues. We are likely to see a ‘waterbed effect’, whereby charges pushed down in one area pop up somewhere else."

“To put it in perspective, card issuers would have to levy annual fees costing the average credit card user £35 a year to recoup the potential £1 billion loss. If lenders tried to recoup this through interest rates alone, we would see APR's increase by 2 percentage points on average"