Virgin increasing credit card interest rate by over 5%

blue.peter

eskbanker said:

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

Glad it's not just me!

eskbanker

blue.peter said:

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.

If you're paying in full via DD then there's no interest to be collected, so for you 1% plus interest equals just the 1%, but the rule is definitely 1% plus interest:

CONC 6.7.5

(1) Subject to (4), a firm must set the minimum required repayment under a regulated credit agreement for a credit card or a store card at an amount equal to at least that amount which repays the interest, fees and charges that have been applied to the customer's account, plus one percentage of the amount outstanding.

https://www.handbook.fca.org.uk/handbook/CONC/6/7.html

Superhoopza

blue.peter said:

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.)

Read further down the statement, there's a box showing how the minimum is calculated.

Yes monthly interest is the amount charged for the statement period.

k12479

MattMattMattUK said:

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. 

Higher rates would a) still encourage paying down debt, or it should, and b) increase income to compensate for higher risk and default

I mean how entities that actually put their capital on the line rate you, not the random numbers.

I said necessarily, some, admittedly a tiny minority e.g utilising 0% deals, will be quite savvy. And I was trying to be charitable.

Superhoopza

k12479 said:

MattMattMattUK said:

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. 

Higher rates would a) still encourage paying down debt, or it should, and b) increase income to compensate for higher risk and default

I mean how entities that actually put their capital on the line rate you, not the random numbers.

I said necessarily, some, admittedly a tiny minority e.g utilising 0% deals, will be quite savvy. And I was trying to be charitable.

or c) put people into more spiralling debt as the interest rate is higher than the amount they can afford to pay when they accepted the original rate and therefore actually make them more likely to default.

blue.peter

eskbanker said:

If you're paying in full via DD then there's no interest to be collected, so for you 1% plus interest equals just the 1%, but the rule is definitely 1% plus interest:

CONC 6.7.5

(1) Subject to (4), a firm must set the minimum required repayment under a regulated credit agreement for a credit card or a store card at an amount equal to at least that amount which repays the interest, fees and charges that have been applied to the customer's account, plus one percentage of the amount outstanding.

https://www.handbook.fca.org.uk/handbook/CONC/6/7.html

Ah, yes. That makes sense. It's the past tense of the rule that matters here - "... that have been applied...". The calculation looks back to the interest already charged, and not forward to the prospective interest charge for the next month. So if I was only to pay the minimum due, I'd incur interest and next month's minimum would be a good deal higher.

1% + interest, fees and charges still seems a very low threshold to me. Anyone consistently paying the minimum is going to take a very long time to repay their debt. I'm surprised that the FCA rule is as relaxed as it is.

I'm pretty sure that the minimum used to be a lot higher than this when I first had credit cards - and that was before financial services were regulated!

Hoenir

Superhoopza said:

Hoenir said:

Superhoopza said:

Yep Santander increased 5% in January. 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 but not to existing customers who may have accepted that rate because it works with their budget or whatever the reason for taking credit was.

Fixed rate products are available. Borrow at a floating rate you have to take the rough with the smooth. Consumers have no grounds to complain. 

So they can do what they want and that's fine because it's 'in their terms'. Hope you don't encounter any unforeseen issues and when you need help people just quote terms and conditions and hindsight to you whilst you struggle.

You do understand how finance works. If cost of funding rises so will lending rates.  Credit cards are generally expensive as the rate of defaults is high. People have a choice as to whether borrow money or not. There has to be a degree of personal responsibility taken.  Not the constant blaming of someone else that so often heard these days. 

MorningcoffeeIV

blue.peter said:

eskbanker said:

If you're paying in full via DD then there's no interest to be collected, so for you 1% plus interest equals just the 1%, but the rule is definitely 1% plus interest:

CONC 6.7.5

(1) Subject to (4), a firm must set the minimum required repayment under a regulated credit agreement for a credit card or a store card at an amount equal to at least that amount which repays the interest, fees and charges that have been applied to the customer's account, plus one percentage of the amount outstanding.

https://www.handbook.fca.org.uk/handbook/CONC/6/7.html

1% + interest, fees and charges still seems a very low threshold to me. Anyone consistently paying the minimum is going to take a very long time to repay their debt. I'm surprised that the FCA rule is as relaxed as it is.

They were concerned about 'payment shock' at the time - customers moving from repayments as low as 0.25% to the equivalent of as much as 4% or even higher was a stretch for many people as it was.

There's an argument that it could be nudged higher in smaller increments.

eskbanker

blue.peter said:

1% + interest, fees and charges still seems a very low threshold to me. Anyone consistently paying the minimum is going to take a very long time to repay their debt. I'm surprised that the FCA rule is as relaxed as it is.

That's why the FCA introduced the persistent debt regime in 2020, as a mechanism to deter long-running minimum repayment:

https://www.fca.org.uk/news/press-releases/fca-tells-credit-card-firms-review-their-approach-persistent-debt-customers

https://www.moneysavingexpert.com/credit-cards/persistent-debt-help/

Superhoopza

Hoenir said:

Superhoopza said:

Hoenir said:

Superhoopza said:

Yep Santander increased 5% in January. 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 but not to existing customers who may have accepted that rate because it works with their budget or whatever the reason for taking credit was.

Fixed rate products are available. Borrow at a floating rate you have to take the rough with the smooth. Consumers have no grounds to complain. 

So they can do what they want and that's fine because it's 'in their terms'. Hope you don't encounter any unforeseen issues and when you need help people just quote terms and conditions and hindsight to you whilst you struggle.

You do understand how finance works. If cost of funding rises so will lending rates.  Credit cards are generally expensive as the rate of defaults is high. People have a choice as to whether borrow money or not. There has to be a degree of personal responsibility taken.  Not the constant blaming of someone else that so often heard these days. 

More than likely I understand it better than you so thanks for the attempt at patronising me. It doesn't mean giving creditors a blank cheque to change rates that people have signed up to whenever and by however they much an acceptable practice. If they didn't have people to lend to, they wouldn't have a business (not in that sector of their company anyway) so its a two way street.