The Bank of England's recent interest rate cut of 1.5% may have been a shot in the arm for UK PLC, but this particular credit crunch has just as much effect on the average person in the street as for big businesses and the banking sector. So will the reduction of the base rate to 3% have any major impact on the 72 million credit cards currently in circulation?



Mortgage borrowers are eagerly awaiting news of the trickle-down effect reducing their monthly mortgage repayments. But credit card customers have been warned not to expect the same benefits, with interest rates on cards remaining unchanged. Consumers look set to continue paying an average of just over 17% APR on their cards, with no change as a result of the base rate cut due any time soon. The credit card lenders tend to only reduce interest rates to attract new customers, with 0% deals for fixed periods being the carrot of choice to draw customers in. However, in the current economic climate, lenders are reluctant to expose themselves to potential problems further down the line. An impulsive reduction of rates could actually compound the issue, destabilising an already shaky financial marketplace. Nobody wants to see another major firm go to the wall, and a sudden reduction of income as a result of APR cuts could start a chain reaction that would be difficult to bring under control. For the moment, maintaining the status quo is a more pragmatic approach.

The lenders are more aware (and increasingly concerned) by the prospect of 'bad debt' eating into their profits, as some cardholders struggle to make repayments. Profit is intrinsically tied up in the amount of interest charged, and consequently lenders are fighting hard to make sure those profits aren't squeezed further by cutting interest rates, despite Government attempts to boost the economy at ground level. This reluctance to expose their companies to a worsening position has drawn the attention of the Prime Minister and the Chancellor, prompting them to call for a "new, responsible approach" to lending. Card lenders in return have made it quite clear that they do have their customers interests at heart, and stabilising the market is their first priority, rather than making knee-jerk cuts that could cause more problems than they solve.

Store cards are some of the worst offenders, cashing in on customer loyalty and a high street that relies on continuous spending. The average credit card APR rate has risen from 16.8% in 2007 to 17.6% today, despite the interest rate almost halving from 5.75% to 3% during the same time. Store card rates have risen more sharply, up by 1% over a six-month period. The most expensive store cards now charge an average of 30%. Government officials have been angered by the reluctance shown by card lenders to reciprocate the base rate cuts, accusing the credit card companies of behaving "irresponsibly" despite the mounting pressure from the Government and the public to mirror the base rate cuts with cuts of their own APR levels. Credit card lenders, however, remain steadfast in their refusal to adjust interest charges, knowing that to do so could damage the market far more than 'instant fixes' such as rate cuts.

The fear is that credit card companies, suddenly aware of their exposure to 'bad debt', are coming down hard on debtors over relatively small sums of money owed on cards, sometimes after the cardholder has missed only a couple of monthly payments. The mounting interest charges can mean that the minimum monthly repayment barely covers the cost of administration charges and interest payments. The Citizen's Advice Bureau backs up this claim, saying that 20% of all new debt inquiries in 2007-08 related to credit card, store card and charge card debts. The Consumer Credit Counselling Service also stated that it had seen a surge in 'charging orders' by card firms, as the lenders try to minimise their debt positions.

The UK has not followed the US example, where interest rates on credit cards have been reduced following their own base rate cuts. Card lenders point the finger firmly at the Government, claiming that regulation such as the 2006 decision by the Office of Fair Trading to cap penalty fees to 12 (as well as their own falling profits on payment protection insurance) are directly responsible for their reluctance to change the APR rates. They claim it leaves them unable to reflect the changes in the base rate with their own cuts. With such a difficult position, it is unlikely that card lenders will be cutting the APR on credit cards any time soon. But a smart consumer can, if they're willing to do a bit of homework, can still find bargains in the credit card market. They can also rest assured that for once, the market is actually quite stable. The 'readjustment' has had its benefits.