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18/01/11

Interest rates on credit cards to rise by 2%-3% in the next three years

A new report from accountancy firm PWC suggests families are likely to be facing higher costs for borrowing on credit cards in the coming three years with rates on unsecured debt predicted to rise by 2%-3%.

PWC suggest the increase in charges could add £1,800 a year by 2015 to the typical household's credit card bills.
The hike in charges is a consequence of lenders facing rising costs owing to regulations that mean banks need to hold more capital, as well as the continued shortage in liquidity.
Furthermore, lenders are expected be more cautious about who they were lending money to meaning consumers might turn to different types of loans if they find themselves blocked from mainstream lenders.

PwC's annual study into the UK consumer credit market revealed some very interesting findings. There appears to be the beginning of a fundamental change in consumer behaviour and attitude towards debt. One simple but very important observation is that people are borrowing less, so through 2010 consumers repayed about £500 of their unsecured debt and that trend is expected to continue through 2011 where consumers are expected to pay a further £200-£300 off of their debt.

Simon Wescott, Director of PwC commented:
“We're predicting fundamental changes in the way that consumers borrow. We think that people will increasingly turn away from large unsecured loans and open ended credit cards and will seek out more controllable forms of borrowing, so that will mean smaller loans over shorter periods of time and I think that's going to present a big challenge for the industry to innovate and offer products that will meet those needs.

I think the second big challenge is going to be around increasing interest rates and we predict that the cost of borrowing for consumers could increase by 2 to 3% over the next 3 to 5 years and the industry needs to establish how will it pass on that cost to consumers; so will there be any return of annual fees, how will business models change.

I think the final area that the industry really needs to consider is regulation and I think we've all become well experienced with dealing with the mounting volume of regulation, but I think that the thrust now will be about simplicity so the industry's made huge progress in terms of transparency. It's effectively lifted the bonnet so we can all see the engine, but what we're realising now is that the average consumer actually doesn't understand how the engine works so we need to find ways to reinvent products on a much simpler basis and to find more straightforward means of communicating the cost of credit to consumers.

I think the cloud on the horizon for the UK consumer is rising interest rates. We have all become conditioned to living in a low interest rate environment and we predict that by 2015, interest rates could have risen such that households will have to find an extra £1,800 a year just to pay the additional interest on servicing their debts and that is going to be a bitter pill to swallow for some."