Virgin increasing credit card interest rate by over 5%

k12479

Superhoopza said:

k12479 said:

Superhoopza said:

Seems a very poor practice to do this to existing customers. If they wanted to increase the rate to new customers who have the choice then fair enough...

That would be very poor practice for them.

The credit quality of their existing customers would deteriorate (because they wouldn't be incentivised to reject the change and stop further spending or to reduce their current spending) with no increased income to compensate. Simultaneously, the quality of their new customers would also deteriorate as the rate would have to be increased further, putting off the better quality ones.

Besides, customers do have a choice - reject the change and stop using it. You can't expect a rate to be maintained forever.

So you're saying the way to incentivise customers to reduce their credit balance is to pump up their rate? 

Please define better quality customer for a credit customer? Better as in pays off their bill each month and incurs no interest? That would be a bad type of customer for the creditor.

Yes. How else can you encourage people to spend less/repay a balance? The general advice around debt is "pay down the most expensive first". If Santander don't move their rates in a changing market then people will prioritise other debt that has, to Santander's detriment. In addition, with default rates rising people have to pay to compensate for the increased risk.

Better quality credit risk. Those that have a higher credit rating, are more creditworthy, however you want to put it. Someone who pays off each month is not necessarily a better risk than someone who carries a balance, but if they are then their spending is probably more resilient so Santander would still benefit from more stable transaction fee income.

Superhoopza

Superhoopza said:

MorningcoffeeIV said:

Superhoopza said:

Reject the change and be on an arrangement to pay scheme which will damage their credit history for 6+ years, all because the creditor changed their rates?

There would be no AP on rejecting the rate.

Good to know, because the communication from santander said if I rejected the rate increase, the card would be stopped and a payment plan set in place to pay off the balance. I took that as being an arrangement to pay.

Just checking @MorningcoffeeIV that I have understood correctly? Would repaying the balance on a payment plan put in place by Santander following someone rejecting the increased rate be seen as an arrangement to pay?

blue.peter

Superhoopza said:

MorningcoffeeIV said:

There would be no AP on rejecting the rate.

Good to know, because the communication from santander said if I rejected the rate increase, the card would be stopped and a payment plan set in place to pay off the balance. I took that as being an arrangement to pay.

My letter from Santander said:

2. Close your account and pay back the balance at your existing rate
If you don’t want to accept the changes to your interest rates you can tell us before 20 May 2024.
If you choose this option, you can pay back your balance over time in line with your terms and conditions, at the
existing interest rate but:
l You won’t be able to use your card for further transactions.
l You’ll need to cancel any regular payments and subscriptions that you make on this credit card.
l Any additional credit cards connected to this account will also be blocked.
l Your account will be closed once you’ve cleared the outstanding balance.

That's not an payment arrangement as I understand the term, because it doesn't involve me asking Santander to raise or lower the cost of scheduled monthly payments. It's just a continuation of their standard terms.

Did your letter say something different?

Superhoopza

blue.peter said:

Superhoopza said:

MorningcoffeeIV said:

There would be no AP on rejecting the rate.

Good to know, because the communication from santander said if I rejected the rate increase, the card would be stopped and a payment plan set in place to pay off the balance. I took that as being an arrangement to pay.

My letter from Santander said:

2. Close your account and pay back the balance at your existing rate
If you don’t want to accept the changes to your interest rates you can tell us before 20 May 2024.
If you choose this option, you can pay back your balance over time in line with your terms and conditions, at the
existing interest rate but:
l You won’t be able to use your card for further transactions.
l You’ll need to cancel any regular payments and subscriptions that you make on this credit card.
l Any additional credit cards connected to this account will also be blocked.
l Your account will be closed once you’ve cleared the outstanding balance.

That's not an payment arrangement as I understand the term, because it doesn't involve me asking Santander to raise or lower the cost of scheduled monthly payments. It's just a continuation of their standard terms.

Did your letter say something different?

You're correct this is what my letter said too. Does this mean making minimum payments?

MattMattMattUK

k12479 said:

Superhoopza said:

k12479 said:

Superhoopza said:

Seems a very poor practice to do this to existing customers. If they wanted to increase the rate to new customers who have the choice then fair enough...

That would be very poor practice for them.

The credit quality of their existing customers would deteriorate (because they wouldn't be incentivised to reject the change and stop further spending or to reduce their current spending) with no increased income to compensate. Simultaneously, the quality of their new customers would also deteriorate as the rate would have to be increased further, putting off the better quality ones.

Besides, customers do have a choice - reject the change and stop using it. You can't expect a rate to be maintained forever.

So you're saying the way to incentivise customers to reduce their credit balance is to pump up their rate? 

Please define better quality customer for a credit customer? Better as in pays off their bill each month and incurs no interest? That would be a bad type of customer for the creditor.

Yes. How else can you encourage people to spend less/repay a balance? The general advice around debt is "pay down the most expensive first". If Santander don't move their rates in a changing market then people will prioritise other debt that has, to Santander's detriment. In addition, with default rates rising people have to pay to compensate for the increased risk.

People generally either pay their credit cards in full, or the carry a balance for years or even decades, there will be a small group of people in the middle who either use it as a short term measure, or those who carry debts for a while and then decide to do something about it, but most people sit in the two main groups.

k12479 said:

Better quality credit risk. Those that have a higher credit rating, are more creditworthy, however you want to put it. 

Credit ratings are meaningless numbers, they are manufactured by the CRAs for marketing purposes. 

k12479 said:
Someone who pays off each month is not necessarily a better risk than someone who carries a balance, but if they are then their spending is probably more resilient so Santander would still benefit from more stable transaction fee income.

Statistically someone who pays off every month is a much lower risk than someone who carries a balance. Gross they are more profitable, net they are not. The margins on credit cards as a product is not that high despite what the interest rates might initially indicate, because of the cost of things such as Section 75, as well as a default rate far above most other lending. 

blue.peter

Superhoopza said:

You're correct this is what my letter said too. Does this mean making minimum payments?

Normal minimum or greater. As I understand it, they'd continue to issue statements as normal until the whole of the outstanding debt is repaid. Those statements would show the minimum required each month, but there's nothing to stop you from paying more than that (assuming, of course, that you can afford to), and so repaying it more quickly and paying less interest. The minimum required each month would be calculated on the same basis as an ongoing credit card.

I've just taken a look at my most recent statement. The minimum repayment specified is 1% of the balance. That's less than half the estimated interest figure shown. If, then, I was only to pay the minimum, my debt next month would actually increase even if I didn't use the card in the meantime. I find this horrifying, and am glad that, in the real world, it isn't going to happen to me.

Superhoopza

blue.peter said:

Superhoopza said:

You're correct this is what my letter said too. Does this mean making minimum payments?

Normal minimum or greater. As I understand it, they'd continue to issue statements as normal until the whole of the outstanding debt is repaid. Those statements would show the minimum required each month, but there's nothing to stop you from paying more than that (assuming, of course, that you can afford to), and so repaying it more quickly and paying less interest. The minimum required each month would be calculated on the same basis as an ongoing credit card.

I've just taken a look at my most recent statement. The minimum repayment specified is 1% of the balance. That's less than half the estimated interest figure shown. If, then, I was only to pay the minimum, my debt next month would actually increase even if I didn't use the card in the meantime. I find this horrifying, and am glad that, in the real world, it isn't going to happen to me.

Yep first paragraph makes sense. 

Second bit, just check your statement again, mine says monthly interest PLUS 1% of remaining balance, so whilst it will take a while, paying minimum will reduce down your balance above the interest added.

blue.peter

Superhoopza said:

Second bit, just check your statement again, mine says monthly interest PLUS 1% of remaining balance, so whilst it will take a while, paying minimum will reduce down your balance above the interest added.

Have I missed something? Where does yours say that? It would certainly be more sensible than what I see on mine!

Ah... When you say "monthly interest", do you mean the interest charged for the month to which the statement relates? That's zero in my case, because I paid the January balance in full on 13 February. (My statement above covers the period 19 January to 21 February.)

eskbanker

blue.peter said:

I've just taken a look at my most recent statement. The minimum repayment specified is 1% of the balance. That's less than half the estimated interest figure shown. If, then, I was only to pay the minimum, my debt next month would actually increase even if I didn't use the card in the meantime. I find this horrifying, and am glad that, in the real world, it isn't going to happen to me.

Minimum repayments must be calibrated to reduce balances (assuming no additional spend) so as above it'll be 1% plus interest.

Edit: just seen your later post suggesting otherwise, not sure what's going on there!

blue.peter

eskbanker said:

Minimum repayments must be calibrated to reduce balances (assuming no additional spend) so as above it'll be 1% plus interest.

That's what I would have expected, but I don't see anything on my statement that would do that (see image above). Perhaps there's an assumption that the existence of a DD set to pay the full balance is sufficient? I don't know.