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Credit card companies need to pass on base rate cuts to customers

Mortgage providers are taking a lot of flak for not acting quickly in response to base rate interest cuts to pass savings on to cash strapped home owners. Credit cards are now also under fire for similar failings.

More from Trends and Analysis
12 November 2008

Providers slow to pass on base rate cuts to customers

Providers slow to pass on base rate cuts to customers

The credit card providers perceive a huge risk to their market. Debt per member of the UK population is higher than ever previously recorded.

Not passing on the cut

The credit card giants are not willing to give us immediate savings on out interest rates and they are concerned that the rising numbers of unemployed consumers will see an increasing number of us default on our repayments.

The situation has been described by prominent finance analysts as something of a ‘chicken and egg situation’.

They say that if the companies refuse to pass the savings resulting from the base rate cut to their customers, more of their customers will fall deeper into financial trouble and it was precisely this which the base rate cut sought to prevent.

Why so slow?

The credit card providers perceive a huge risk to their market. Debt per member of the UK population is higher than ever previously recorded. Some experts warn that it was the lenders themselves to blame by investing in subprime consumers, so they should also foot the bill. It was irresponsible lending after all, which started the crisis and caused the credit crunch.

Interestingly, The Bank of England are paying so much attention to the mortgage markets that they seem to be overlooking credit card companies and they are not putting much pressure on them to perform favourably.

The 1.5% interest cuts should be passed on to consumers, but if they aren’t the integrity and ethics of credit card companies will suffer a great blow.

Consumer confidence will too as they will be paying over 5 times the base rate figure set by the Bank of England in interest. Effectively, credit card holders would be paying more than anyone else in the loan arena.

Expert opinion

Financial Analyst Michelle Slade suggested that she doubts lenders will cut rates on credit cards.

She said: "Usually lenders only cut rates to attract customers. The Co-operative Bank is the only lender that currently offers cards with an APR directly linked to the Bank of England base rate.”

As a result, those borrowing from The Co-Operative Bank on their Gold and Platinum cards will receive the full 1.5% reduction in interest rate.

However, Michelle was quick to point out: “The £120 annual fee on the Gold card means the APR will still be a fairly hefty 19.4%."

The hope

Fingers crossed other companies will see the light and follow in The Co-Operative Bank’s footsteps. It’s only by feeling the relief offered by the Bank of England’s base rate cuts that mortgage and credit card customers alike can begin to restore their personal finances and in so doing, restore the integrity of the markets.

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