UK banks are blocking customers' credit cards. Will the USA be next?
Photo credit:
Danesparza
Photo credit:
photooptik It was bound to happen. I just thought it would happen over here first. Today
It's no secret that we've become a spend now, pay later society. It's a practice that is not only made very easy, but very much encouraged on a daily basis by banks and retailers. How many times have you seen or heard ads that say "no interest, no payments, until 2009!" That's great for some people; People who have the willpower to make the monthly payments and get rid of the debt. But most people just stick it on the old store card or credit card and forget about it. Until the bills come rolling in years down the road and a debt they had forgotten to account for suddenly turns the budget upside-down.
Hey, but never fear. There's always another credit card company around the corner. Just get another card and hey presto, you're back in business with more spending power, right? Well, maybe not. Egg, a banking giant in the UK, has decided to save the worst customers (around 7% of its 2 million customers) from themselves by blocking the cards and allowing no more spending. They get a letter informing them that in 35 days, their credit card will no longer work. Simple as that.
Other banks are expected to follow suit as the economy continues to tank and more people are making late payments, or no payments at all. What's more, getting a credit card is getting a whole lot more difficult in my homeland. Banks and credit card companies are turning away roughly half of all applicants. The acceptance rate, until very recently, was around 2 out of 3.
Barclaycard, a once reliable source of cash from Barclay's Bank, is preventing some customers from using their credit card to withdraw cash. And one in five credit card holders are having their spending limits slashed.
Is this right? Do we really need to be procted from ourselves, or is this a basic violation of our consumer rights? As a consumer advocate you think I'd be torn, but I think the general public have been spending without prejudice for way too long and the results are showing. Maybe we really do need a big brother figure to watch over us when things get this out of hand.
Several other banks in the UK are soon expected to follow suit, and I'm sure the US banks are watching very closely. Tired of getting burned by non-payers, bankruptcies and credit-card shufflers, the US banks could soon be striking back at consumers who are consuming way more than they can afford. It may just be one of those shocks to the system that America needs. A basic right, a credit card, could soon become much more of the privilege it used to be. And about time, too.
Additional photo credit: photooptik
Tagged: Personal Finance, Consumer Affairs, Debt Management, credit, credit cards, debt, Egg, finances
Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.
I think it's a good idea and will promote fiscal responsibility...albeit painful for some people. Sometimes you have to go through a rough spot to gain maturity, insight and appreciation. We don't have a "right" to spend someone else's money.
As someone who is very slowly getting rid of a 5k GBP debt with egg I wish they had done it sooner. Credit cards are far to easy to use if you lack self control.
I don't think this is just impending recession that is forcing UK financial institutions to rethink their approach to lending.
In the next few weeks/months the results of a test case between 8 of the High Street banks and the Office of Fair Trading could potentially cost them billions in having to repay charges made to people for going overdrawn. This may ultimately change the face of banking in the UK.
Although the likes of Barclaycard are different legal entities from partner banks such as Barclays - the balance sheet of the credit card and bank will impact on each others reputations.
You ask the question in your entry 'will US banks be next'. Egg is owned by US owned Citibank... So the answer is the US is already a player in this current action.
I suspect the banks are doing this out of their own self interest rather than any desire to protect consumers from themselves.
I can't say that I blame them. Would you loan money to someone who is not likely to pay you back?
Those of us that pay on time or don't even use credit anymore (yeah me!) will somehow eventually pay for the ones that never pay. It will come in higher banking fees or in lower wages for their employees. Big companies like that will not operate at a loss and will find subtle ways to get it all back eventually.
This is why I've said many times that people should have an emergency fund, and not just rely on access to credit as their protection against lost income or unexpected expenses--access to credit can be lost at any time.
As Dwight says, I doubt very much that this is the banks trying to protect customers from their own foolishness. Until recently, the banks have made a lot of money from their most foolish customers. In an economic downturn, though, the foolish customers may well stop paying not only the interest and fees, but also the principle amount owed. The banks are just trying to stop the bleeding from their own bottom lines.
What a load of sanctimonious rubbish. This is about nothing more than business. They are dumping unprofitable business not just recalcitrant payers. It is time that people stopped seeing banks as anything other than profit making machines. They are not your friend when the going gets tough and they will screw you to the floor and after you are dead if they can get away with it. Maybe the lack of credit will be a reality check for us but just remember what is paying for goods and services and keeping the economy afloat.
PS. Egg is not a giant in the UK but a minority player, recently taken over by yes you guessed it an American bank.
Who ever said or believed Banks were your friend or you were a friend of theirs? They are a business and you are a "business" entering into a business relationship. Why you would get angry about that is unclear to me. If you look at it any other way, who's fault is that? No reason to yell or whine about arrangements you enter into willfully. Too much blame shifting in this world. It is the banks fault if I overspend and can't control my use of credit - - Please. Gosh, you mean they expect to get the money BACK?
Sounds like rubbish to me too. The credit card banks have zero moral authority, and if they are canceling cards in this kind of mass action, I'd like to see their former customers organize a mass refusal to pay existing debt, or to at least organize as a group to extract much better terms. That would be something to see.
What is interesting is the number of Egg customers who have contacted the BBC to say that their card is one that has been canceled despite carrying no balance and never missing payments, they are now accusing Egg of closing accounts that aren't making them money. It would be interesting to know just how many canceled cards were maxed out and how many were paid off.
As for the original point of closing accounts of those with poor credit I don't think it would necessarily help in any way, while I agree that it is usually their own fault they ended up living off their credit cards, giving only 35 days notice could be very problematic for some families.
I got in over my head once, and it's taken a long time to get back. With a 35 day warning, I can only imagine what I'd have done. Panicked, for a few days, then looked really hard at what I needed to do now. Hopefully, a few people won't be digging farther down once they've hit rock bottom with this kind of process...
I didn't see much mention of whose credit will be cut - repeat non-payment of bills? 3 strikes and then the money is scrounged up for the minimum, and then three more months of non-payment? No idea either if other customers are being given greater spending limits now, too.
When someone has to declare bankruptcy, the banks don't get very much back. Not letting someone who's sinking that far keep sinking just might gain them what they'd loaned, instead of a percentage of very little.
I have had a card cancelled on me because I never used it, and one of my friends had a card cancelled because he always earned a good amount of rewards and always paid it off. The credit card companies aren't trying to help the consumers, they are just trying to help themselves. I saw a documentary where they called the people who pay off creditcards "deadbeats" because we don't make money for them.
I am confused as to why they would cancel a cc simply because you paid the bill. Most CC companies make their real money off the business you charge with. Charging as much as 3 to 4% of each transaction. That is why companies like American Express can offer rolling credit without interest.
Finally! Maybe this is the path to a better credit scoring system where people with out of control spending will have a harder time bringing themselves to default. Having a credit limit that is higher than a month's wage income never was a good idea in the first place.
Without a job due to a tech bust layoff, I went 14 months unable to find work, after having just received a promotion (the company had never laid off anyone previously, and my career path looked rock solid) and buying a house. I had a year's worth of emergency fund, but some unexpected repairs ate it in eight months. I then had to turn to my credit card, which I deliberately kept with a low limit, and finally a high-interest consumer loan to survive the drought. When I got work again, I started paying off and am now free of all debt other than my mortgage. But if I had been denied access to a total of $10,000 in credit because of how suddenly I had needed to access it, I literally would have lost everything and been homeless.
Long story short -- they need to have in place a way of overriding this decision to allow responsible people access to the credit they have earned in times of emergency.
At first I thought, how CRUDE! But we have to consider that the banks have to protect their best interests. I don't think this is about saving customers from themselves so much as it is about the banks making sure they stop the hemorrhaging of credit as it stands now with customers making more late payments.
I have to second Looby's point - as someone who never carries a balance, the amount of people contacting the BBC about being cancelled with good credit is a bit unnerving. I hope they just stick to canning people who aren't paying them back properly, not those who use credit responsibly.
I doubt US banks will follow suit (or should I say, I doubt banks will follow suit in the US).
The fact of the matter is that the recent Bankruptcy reform makes it incredibly difficult for US debtors to walk away from bankruptcy without debt. Banks (or credit card issuers) are not as 'burned' by US defaults as customers in other countries.
I have just finished reading 'Maxed Out' (as well as watching the film). In it, an debt law expert from Harvard disclosed that the 'worst' customers generate the most revenue for credit card companies. Those who emerge from bankruptcy are actually pursued by credit card companies. They tend to be addicted to credit. And with incredibly high interest rates and fees and surfing (paying off old debt with new debt), these debtors are stuck in an endless cycle, with death being the only exit.
IMO, it resembles the days of indentured servants. It's like debtors prison, except without the physical walls.
Regardless of whether you blame debtors or predatory lending, I recommend reading the book or watching the movie. There really are no substantive financial penalties to credit card companies when their customers default, at least in the US. Therefore, I don't see this practice taking hold in the States. It will take federal regulation.
Debt and human addiction to taking on debt has existed for a long long time. When it comes to debt, I do believe that people do need to be saved from themselves.
...where I would fall in the grand scheme of it? I am not "in debt" but I carry my Xmas bills over maybe 2 or 3 months, I am not a credit card "deadbeat" either. They make a little off me, but not much, since my rates are still good.
It's scary because I too think that credit should be there for tough times; but I do have my emergency savings too.
I disagree with the previous post. I do believe that credit card companies make money of each transaction, but the fees those transactions generate are no where near the fees that are collected from late payment charges and interest collected when consumers pay the minimum payment.
I have a friend who used introductory 0% APR rewards credit cards to for purchases and bills. He would pay the minimum, collect an extra 5% in rewards and then when the 0% period ended, he would pay off the entire balance. Then he'd cancel the card and apply for a new one. He continually did this with multiple cards for many years.
While the card company may have made 3-4% in transactions, they lost out in terms of rewards (most of which were cash rebate checks.) Just recently he has been applying for 0% cards and has gotten rejected. And this is a person who pays everything on time... but he doesn't pay a penny in interest.
Perhaps I'm cynical, but his credit card companies have probably realized that they may be losing money on him and just don't want to extend him any more credit. They may have finally gotten a formula to weed him out.
Interesting that banks may stop people from spending, while our "fearless leader" is asking for tax rebates that will supposedly encourage people to spend. Anyone else see a conflict here?
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