UK Bank shutting off credit cards

February 2, 2008

This link
from the UK’s Daily Mail talks about a credit card company’s plans to
’shut off’ 160,000 customers’ card because of ‘overspending’.

A banking giant is banning 160,000 debt-ridden customers from using
their credit cards. They will receive letters in the next few days
warning them their Egg credit cards will stop working in 35 days’
time…. They are being targeted because they have a “higher than
acceptable risk profile”, said the company. This typically means they are spending over their credit limit or failing to make even minimum repayments every month.

I’ve noticed this a lot in the past several years of following personal finance issues.  Back in my
day (man, I’m feeling old!) if you had a limit of $500 on a credit
card, if you tried to charge over that limit, you’d be declined.
 Simple as that.  Perhaps slightly embarassing, but it kept people in
check.  

Some time in the mid 90’s or so, I guess, banks stopped doing that,
opting instead to let you keep charging but charge ‘over limit’ fees
and add those to your balance.  No doubt this has made banks enormous
extra profits - it’s almost a no brainer from their standpoint.  But
then why have limits at all?  

I heard a caller to a talk show explain how he got in to a credit card
mess.  A large bank (might have been Citi but I can’t recall exactly)
offered him multiple small cards of $300-$500 limits, so he ended up
with around 7 of these things, and was constantly ‘over limit’ on each
one - $35 each month for each card, plus interest fees and such.
 Surely this man was to blame, at least in part, for being in debt, but
the bank was either insanely stupid, or extremely predatory.  Given the
number of smart and well paid people at the banks, I doubt it was
because they were stupid.  They were banking on this guy to behave
exactly as he did.  Given a combined outstanding total of around $4000,
they were able to charge him about 28% interest, PLUS legitimately
charge another $200+ in ‘over limit’ fees every month.  Add that up -
$2400 in ‘over limit’ fees, plus 28% interest (ballpark average for
cards in default or ‘over limit’ for extended periods) is close to
$1200.  That’s $3600 in interest and fees on a $4000 balance.  These
banks know exactly what they’re doing.  

So something must REALLY be going wrong in the UK if a bank is shutting off such a lucrative supply of fees.  What might it be?

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Posted in Business, Finance