Why aren't credit card rates lower?

worriedne

There are some great 0% deals around but why are standard rates still SO high?
I was thinking - savings rates have been slashed, mortgage rates are rock bottom etc yet most CC companies still have ridiculous rates and if you have used most of your balance it can be hard to switch.

Why isnt there new competition in the sector /why are consumers still paying so much?
It just seems we all accept that CC rates are high - but shouldn't it be challenged?

andyfromotley

Its something i have often pondered too. the average normal interest rate is what ... 17%.

We would all blanch at loans or mortgages of that rate.

Of course all of the teaser rates have to paid for of course, as do the majority of CC users who repay in full and pay no interest. (about 60% of current users) Although some of this may be offset by the charges to retailers, but this is to be curtailed by EU legislation.

I had a quick google of MBNA's profit £120m on 3 million cardholders. So they are averaging £40 per customers which hardly seems excessive on the bare figures. Although the profits were dampened by PPI provision of £350m. So without that perhaps looking at profit of around £140 per customer, per year.

Perhaps the rates do reflect the cost of running the business and making a healthy profit. The market is undoubtedly competitive in that there are many companies involved, No suggestion of collusion on price, yet they are all in the same ball park cost wise.

The key is of course that it does offer the savvy credit worthy consumer the opportunity to use their products at virtually no cost. not many companies do that so we just have to make sure that we are on the right side of this deal and let others fund our free borrowing.

grumbler

The main law of finances is the higher the risk, the higher the interest rate.
CC debt is unsecured and, I think, is behind only payday loans in terms of the risks for the lenders.
Stupid section 75 of the CCA makes CC lending even more risky, that has to be incorporated into the cost/rate.

katejo

andyfromotley wrote: »

Its something i have often pondered too. the average normal interest rate is what ... 17%.

We would all blanch at loans or mortgages of that rate.

Of course all of the teaser rates have to paid for of course, as do the majority of CC users who repay in full and pay no interest. (about 60% of current users) Although some of this may be offset by the charges to retailers, but this is to be curtailed by EU legislation.

I had a quick google of MBNA's profit £120m on 3 million cardholders. So they are averaging £40 per customers which hardly seems excessive on the bare figures. Although the profits were dampened by PPI provision of £350m. So without that perhaps looking at profit of around £140 per customer, per year.

Perhaps the rates do reflect the cost of running the business and making a healthy profit. The market is undoubtedly competitive in that there are many companies involved, No suggestion of collusion on price, yet they are all in the same ball park cost wise.

The key is of course that it does offer the savvy credit worthy consumer the opportunity to use their products at virtually no cost. not many companies do that so we just have to make sure that we are on the right side of this deal and let others fund our free borrowing.

Exactly! I take advantage of 0% deals but always pay it off in full. If I can't do that, I don't spend.

eddddy

worriedne wrote: »

...
Why isnt there new competition in the sector /why are consumers still paying so much?
It just seems we all accept that CC rates are high - but shouldn't it be challenged?

I guess it's because people are willing to pay those rates, so the banks have no incentive to reduce them.

If people stopped borrowing on CCs because they were too expensive, I suspect the banks would find ways of reducing the rates.

Sharon87

True with the above poster. People are prepared to pay it. Credit cards are now cheaper than most overdrafts and they're a lot cheaper than pay day loans. I think people don't like loans as they're more for larger purchases, £7,000 seems too excessive for what people want a credit card for, eg 'I just want a new TV'.

Also as the OP said there are lots of 0% deals around, they have to offset the cost somehow and not everyone pays them back before they expire.

I personally think most standard rates of credit cards are reasonable

congaman

Yes but remember that credit cards are a three way transaction between 1)you the punter 2)the card company and 3)the retailer who stands the hiked up cost of the transaction. Also that the real way the card companies make their money is not by overdue payments but by the transaction costs to the retailer. As a retailer I had got to the point of refusing such cards as MasterCard World etc because of the charges. By using a credit card you're merely lining their pockets with a very clever scam

grumbler

If this is just a 'scam', why do all retailers, like you, simply not stop accepting CCs? On the contrary, Aldi used not to accept CCs, but started accepting Visa and Mastercard CCs recently.

chattychappy

grumbler wrote: »

Stupid section 75 of the CCA makes CC lending even more risky, that has to be incorporated into the cost/rate.

Oh yes, one of my bugbears. Put a few quid on a card, pay the balance by another means and put the CC on the hook for a claim far in excess of the transaction value and even more in excess of the commission they would have made. We all pay for this.