Credit Card Users Feel The Squeeze : Credit Card Guide

Credit Card Users Feel The Squeeze

The signs of a crackdown on consumer credit are beginning to show, as half a million credit card holders have had their spending limits cut. The limits have been reviewed for many of Barclaycard’s customers, and the company is also rejecting more applications for new cards than it used to.

High Street credit looks to be up for a squeeze as lenders tighten their lending criteria. Although there has been a general tightening all the way through the year, the latest move is seen to be a direct result of the recent crisis at Northern Rock, which followed turmoil in stock and credit markets the world over.

A Barclaycard spokesman said: “We have been going through a review since 2006 and lowered credit limits for 500,000 cardholders where customers are over their limits or where they have become over extended.”

Profits at Barclaycard fell by 17% in the first six months of 2007 as bad debts flew up to £1.5bn. Now around half of all applications for Barclaycards are rejected. Any would-be borrower with a poor credit history is going to find it hard to take out a new credit card, or a loan as banks are beginning to avoid risky borrowers. The bad news for consumers will become bad news for High Street retail outlets as a difficult Christmas now appears to be likely.

The mortgage market is also getting tougher. Both Abbey and Halifax have recently raised tracker rates by 0.2%, with no link to the Bank of England’s base to do so.

Experts also say that it will be even harder for first-time buyers to raise 100% funding for the first home. Malcolm Hurlston, founder and chairman of the Consumer Credit Counselling Service (CCCS), expected borrowers to have difficulties managing to pay their credit card bills and loan repayments as the cheap fixed rate mortgages come to an end throughout the autumn. There are about 300,000 fixed rate mortgages that are scheduled to come to an end before the end of the year.

It looks like the number of repossessions will continue to grow, and to deal with borrowers experiencing difficulties with mortgage payments and faced with losing their homes, the CCCS is to set up a specialist repossession unit.

Borrowing by consumers in the UK has steadily increased in the last ten years to reach £1.4bn, and the fastest loan growth in the last several months has been where consumers have borrowed against the values of their homes, which have increased substantially in recent years. That trend is about to come to and end as the property market continues to stall.

All this is set against the background of the global credit crunch and the International Monetary Fund (IMF) says that an economic slowdown is likely, with the US likely to be worst hit in 2008. Former US Federal Reserve Chairman Alan Greenspan reckoned there is a 50% chance of a recession in the US.

According to the IMF, even if credit markets recover, the turmoil could have "far reaching and significant" consequences. Economic growth for the world should remain high in 2008 – mainly buoyed driven by the Asian economies - it will be lower than the levels of 2006 and 2007.

Tom Smith
29th September 2007

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