Customers now face annual fee … just for owning a credit card

Published on Sunday 8 November 2009 21:40

CREDIT card customers can expect to pay more for the service as companies prepare to hike their interest rates and introduce annual fees in the battle to survive the financial crisis.

Lenders' current business models are "unsustainable" due to increasing bad debts, funding constraints and the toughest economic conditions for a generation, accounting giant PricewaterhouseCoopers said.

Its research suggests large-scale change within the sector is inevitable during the coming few years, with cards likely to be transformed from borrowing tools into payment ones.

The report added that the interest rates charged to card users are likely to be increased, while annual fees charged for just having a card will become a common feature.

At the high end of the market, customers can expect 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 per cent of its take-home pay just on interest payments on debt.

Richard Thompson, partner at PwC, said: "There has been a cooling passion for plastic – credit card borrowing has fallen by 3 per cent to 64bn and the number of cards in circulation by 8 per cent.

"Bad debts in the sector have reached historic highs, standing at nearly 6 per cent of outstanding balances. Our analysis suggests that bad debts are likely to continue to rise and could reach 9 per cent by the end of 2010.

"This would have enormous implications for the profitability of credit cards. Large-scale change within the sector over the next few years is inevitable."

The group said as the economic recovery gained momentum, consumer demand for credit was likely to return, but lenders were likely to be either unable or unwilling to meet this demand. Instead they would focus on the customer groups that were most profitable.