Credit card data sharing for responsible lending (or profiteering?)

By Reno Charlton Staff Writer 22 January 2009

Best Balance Transfer Virgin credit card 0% on balance transfers and money transfers for 16 months (2.98% fee) 0% on purchases for 6 months Virgin discounts % APR Read the Virgin credit card review » Related Guides & News 29. 12. 2008: Overnight credit card interest rate hikes could now be over In light of recent meetings between credit card company representatives and the Government, it seems the credit card companies are starting to give way and have now come forward with a pledge to stop overnight rate hikes. 22. 12. 2008: Credit card industry held accountable The credit card industry has been causing concern for Prime Minister Gordon Brown after they stubbornly held credit card interest rates high despite the dramatic fall in the Bank of England's base rate. 10. 12. 2008: Credit card firms agree to help - but will they hold their promise? Following a meeting between credit card company representatives and the business secretary Lord Mandelson, a deadline was set in which the credit card companies were to implement a set of fair principles for lending. 2. 12. 2008: Cardholders fight back against credit card hikes Credit card providers are in the credit card news headlines as they continue to hike up interest rates and fees for existing customers despite the base rate being dropped to just 3%. 18. 11. 2008: 0% balance transfer credit card deals dwindle, but Virgin looks brand-strong with 0% for 16 months Credit card news is reporting a recent decline in the number of 0% balance transfer credit card deals available in the market. However, one thing is for certain and that's the current brand-strength of Virgin and its continued market-leading 16-month 0% balance transfer credit card deal.

HOW you use your credit card will no longer be between you and your bank manager, but shared amongst credit card companies in a bid to promote more "responsible lending".

Credit card companies in the UK have recently revealed plans to share more customer information including repayment amounts, if you use your credit card to withdraw cash and if you have a 0% promotional deal.

The information shared

Up until now credit card companies only shared data including; your current outstanding balance amount, your credit limit amount and whether or not your payments were up to date.

The new data sharing intends to open up information on; exactly how much you paid off your last statement, whether you only pay the minimum amount or not, any changes that have been made to your credit limit, whether you use your credit card to withdraw cash or not, and if you have a 0% interest free promotional deal.

The decision

According to officials from the credit card companies their decision has been made based on the following reasons:

1. To ensure that they are able to practice responsible lending;
2. To try and reduce the number of borrowers that tend to switch from one credit card to another;
3. To ensure that borrowers are not burdening themselves with too much credit card debt.

Barclaycard, Capital One, GE Money, HBOS and MBNA have already started sharing the new set of information. All other credit card companies are set to join the new data sharing as soon as their systems have been updated.

But will it sift out 'responsible payers' or 'profitable users'?

While at first glances the new data sharing may suggest a way to sift out the good 'paying' customers who are not over-indebted, at closer inspection it could also sift out good 'profitable' customers.

Both Barclaycard and more recently MBNA have been caught in the spotlight for encouraging customers to withdraw cash on their credit cards.

In fact, only shortly before Christmas '08, MBNA were seen sending out letters with one in particular stating:

"As one of our best customers we've recently increased your credit limit to £11,200. This means you can withdraw more cash this Christmas to really splash out on yourself and your family."

Unsurprisingly, cash withdrawals almost always attract the highest rates of interest on a credit card. Averaging around 27.9% p.a. cash withdrawal interest rates are often double that of a standard purchase. Additionally, they generate an instant charge of around 2% - 3% of the transaction for the credit card company.

So now that whether or not you withdraw cash on your credit card is being shared between credit card companies, it does beg the question exactly how useful that information is to sift out customers who are more likely to become too burdened with debt - or those that are more likely to use their credit cards in a profitable way.

Additionally, it's always been common knowledge that credit card companies like customers who spend money, keep on top of their payments, but who don't repay their balance in full each month.

While the credit crunch has made almost every bank in the world nervous, and incredibly shy of any 'risky' customers, they are also all in need of profitable ones.

The effect

Exactly how the credit card companies are going to use this new information is obviously going to be to more selectively pick and choose customers to take on, though it's likely exact "pick and choose" criteria practices will vary between lenders.

However, with the financial climate still very difficult and defaults on credit cards expected to rise as things get tougher, it is in the interest of the credit card companies to ensure that customers are not taking on too much in terms of credit card debts.

Coupled with the need for credit card companies to become more responsible with their lending - things are likely to get far more stringent when it comes to the approval of credit card applications.

It has been predicted by other industry sources that the new data sharing will hit the 'rate tarts' the hardest.

However, credit card companies are still promoting 0% balance transfer credit card deals (including Virgin credit card with 0% for 16 months), and those who aren't feeling quite so risky have remodelled credit cards (an example in the RBS Classic credit card and Natwest Classic credit card) to offer low rate for life of balance transfer credit card deals instead.

Credit Card Comparison
Credit Card Guide
Credit Card News