Why do UK credit card rates continue to rise?
Despite the fact that UK base rates are stuck around 0.5% the average UK credit card rate is now around 18%. This would imply a gross profit margin of 17.5%, although in line with other financial insurance, the situation is maybe not as extreme as it may look. The cost of borrowing in the UK, despite falling over the last 18 months, is nowhere near the base rate figure of 0.5% and a ballpark figure of around 4% would seem sensible. This would still imply a profit margin of around 14% on UK credit cards, so how the credit card companies justify these rates?
As with UK store cards, this is very much a chicken and egg situation in that credit card companies want to maintain their current profitability, unfortunately to the detriment of UK credit card customers. As default rates continue to rise the credit card companies are likely to maintain higher interest rates to offset their losses on defaulters. However, in what could be described as a self-fulfilling prophecy, higher rates will force more deferrals in the future which will then place more pressure on customers and increase the bad debts associated with UK credit card companies.
Quite how this situation could be resolved in the short to medium term is unclear at this point in time.
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