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UK ponders death of cashback, air miles and 0pc interest rate credit cards for the savvy shopper


Elavon provides card payment services to more than 32,000 Irish customers

Elavon provides card payment services to more than 32,000 Irish customers

Elavon provides card payment services to more than 32,000 Irish customers

Britons who collect air miles and other rewards from credit cards could see the perks reduced after regulators raised concern that vulnerable borrowers were being "exploited" to fund the deals.

An estimated nine million British shoppers put daily spending on so-called reward cards, with most clearing the balance every month and collecting free flights or discounts on purchases.

A further five million pay no interest on their debts thanks to introductory offers that can last several years.

However, such cards were unprofitable and served as "marketing tools", an industry source admitted.

The UK's regulator concluded that cards issued to prudent borrowers were being "cross-subsidised" by people who failed to clear their debts.

The Financial Conduct Authority initiated an inquiry this week. It warned the market was "not working well for some consumers", who paid an estimated £500m in charges every month after failing to clear debts worth £56.9bn.

More than 30 million people held credit cards in Britain, the FCA said, accounting for seven in 10 of all the credit cards in Europe. "Highly-indebted" customers were "generating a disproportionate amount of revenue for firms", which subsidised the cards issued to more careful borrowers. The FCA will investigate whether banks acted irresponsibly, pushing "vulnerable" customers into debts they could not afford.

"We will look at whether credit cards are marketed and sold in a way that exploits or exacerbates consumer behavioural tendencies with respect to over-borrowing," the regulator said.

"It is commonly believed that there is considerable cross-subsidisation in credit card markets, but there is limited research on the extent to which this might actually occur."

Martin Lewis, founder of MoneySavingExpert.com, said the "death knell" had been sounded for the rewards and airmiles cards favoured by middle-class families.

Banks including Santander, Marks & Spencer, NatWest, Tesco, Capital One, American Express and MBNA offer this type of card. For example, MBNA offers a card which provides one mile for each £2 spent.

Mr Lewis said such cards would become even less profitable next year under an EU charge cap on fees paid by retailers when the cards are used in shops.

A number of providers have already introduced annual fees for customers instead, ranging from £24 to £150. The practice is expected to become common.

Mr Lewis said so-called "rate tarts", who shifted debts of around £2,000 on average between cards that charged 0pc for as long as two and a half years, could also be hit.

Around 42p in every £1 of credit card debt is held on cards with interest-free periods. Earlier this year, Royal Bank of Scotland scrapped the "special offers", leading experts to predict a decline in 0 per cent cards.

"The regulator needs to be very careful that good egalitarian theory doesn't kill a system that works well for the many, but not the few," Mr Lewis said.

Richard Koch of the UK Cards Association said: "We will work with the FCA to ensure that they consider the impact that changes in one particular area may have on other customers."

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