Credit card rates set to increase
Updated on 09 November 2009
Credit card providers look set to hike their interest rates and introduce annual fees as they battle to survive, a report has claimed.
Lenders' current business models are "unsustainable" due to increasing bad debts, funding constraints and the toughest economic conditions for a generation, PricewaterhouseCoopers said.
It said large scale change within the sector was inevitable during the coming few years, with credit cards likely to be transformed from borrowing tools into payment ones.
It added that the interest rates cards charged were likely to be increased, while annual fees charged for just having a card were likely to become a common feature.
At the high end of the market, it expects customers to be charged to have access to premium benefits, while at the lower end, marginal customers will be expected to pay fees for even standard credit cards.
Innovation is also likely to be a key feature of the market, with providers increasingly likely to offer contactless cards, prepaid cards and mobile payments.
The group said total household borrowing had remained broadly constant during the past 12 months at around £1.5 trillion, around £1.2 trillion of which is secured lending, while around £230 billion is unsecured and owed through credit cards, loans and overdrafts.
The average UK household now owes £60,000, made up of a mortgage of around £50,000 and £10,000 of unsecured debt. As a result, the average household spends around 15% of their take-home pay just on interest payments on debt.
Richard Thompson, partner at PwC, said: "Over the last 12 months there has been a cooling passion for plastic - credit card borrowing has fallen by 3% to £64 billion and the number of cards in circulation has fallen by 8%.
"Bad debts in the sector have reached historic highs, standing at nearly 6% of outstanding balances. Our analysis suggests that bad debts are likely to continue to rise and could reach 9% by the end of 2010."
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