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Credit card rates ‘must rise’

Higher APRs and annual fees may be introduced

Annual fees are likely to become the norm in the credit card industry over the next few years, as credit card providers are forced to find ways to tackle the sharp increase in bad debts.

According to a new report by accountants Pricewaterhouse Coopers, the level of bad debts on credit cards could reach 9% by the end of next year, prompting lenders to increase their APRs and start introducing annual fees, which have been commonplace in the US for many years.

The report, entitled Precious Plastic, claims the current business model being used by credit card companies is ‘unsustainable’ – citing funding constraints, tough economic conditions and the introduction of the Consumer Credit Directive next June amongst a number of factors which will force lenders to ‘reinvent’ the products they offer consumers.

Bad credit card debts

According to PwC, credit card borrowing has fallen by 3% over the past year and the number of credit cards in circulation has declined 8%.

Despite this, PwC calculates that the average household has to spend approximately 15% of its disposable income on servicing the interest payments arising from secured and unsecured debts, which typically stand at around £60,000.

The future for credit cards

Richard Thompson, partner at PricewaterhouseCoopers LLP, said: ‘Consumers do not fully appreciate the likely future changes to the market. As the recovery gains momentum, consumer demand for credit will return, but lenders will be unable or unwilling to increase supply sufficiently to match demand. 

‘Large scale change within the sector over the next few years is inevitable. We’re likely to see credit cards being reinvented as payment rather than borrowing tools.’

Which?’s Money Editor James Daley said: ‘Credit was handed out too easily to consumers in the earlier part of this decade, so it’s no surprise that increasing numbers are now struggling to keep up with their payments. 

‘Anyone who finds themselves in trouble should talk to their lender as soon as possible, and should seek independent advice from an independent organisation such as the Consumer Credit Counseling Service, who will help them get back on top of their finances.  

Check out the free Which? advice guide on How to deal with debt, and search for a better credit card deal with our independent credit cards review.

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