What Brexit might mean for credit card consumers

By Marianne Curphey

Financial markets were thrown into turmoil and the British pound fell to a 31-year low following the UK's vote to leave the EU. While the long-term effects of the decision are hard to predict, here's how it might affect the credit card market in the UK.

Interest rates
Credit ratings agency Fitch warned before the referendum that interest rates could become "more volatile" in the event of a vote to leave. It said the Bank of England would most likely be forced to increase interest rates over the next few years, after a period of enjoying record-low rates.

Immediately after the referendum results became public, the credit rating agency Moody's said the Brexit vote will herald a "prolonged period of uncertainty" for the UK, with negative implications for economic growth in the medium terms. It lowered the outlook on Britain's long-term issuer and debt ratings from "stable" to "negative". brexit

This may mean that the UK and its companies will find it more expensive to borrow money, which could impact interest rates on credit cards. However, the effects may not be felt immediately as many people have 0-percent deals that are fixed for a year or longer.

Tip: If you are considering applying for a new card with the current market leading rate, it is worth doing so now before interest rates hike.

Access to credit
The UK and its banks are now seen by world markets as a greater credit risk as a result of the Brexit vote, according to Moody's and Standard & Poor's. Both ratings agencies have downgraded Britain's sovereign debt rating.

The demotion was not unexpected. Though S&P still held onto its AAA rating on 24 June, the day of the referendum results, Moritz Kraemer, chief ratings officer for S&P, had told the Financial Times, "We think that a AAA-rating is untenable under the circumstances."  By 27 June, S&P had lowered the rating to AA.

The research firm Bernstein warned before the vote that almost all UK banks would face big problems as a result of Brexit, but Barclays, which holds 25% of the credit card market, will take the biggest hit.

Bernstein predicts that unsecured lending, which includes credit cards, will fall by 6% to 8% as a result of a rise in unemployment in the UK and strategies by the banks to lower risks.

"Credit cards, personal loans and buy-to-let (BTL) mortgages are the three books that have shown signs of life in the UK in the past 3-4 years ... but these three are the ones which are likely to take the biggest hits in a Brexit scenario," Berstein analysts Chirantan Barua, Daniel Lasry and Mark Burrows stated before the vote.

Tip: As debt is likely to get more expensive across all types of lending -- mortgages, loans and credit cards -- it is worth taking a look at your personal debt and starting to aggressively repay, even if it means getting creative to pay it off.

Interchange fees
Every time a debit or credit card transaction occurs, the retailer's credit card processor has to pay an interchange fee to the consumer's card issuer. In 2015, the EU put in place a 0.3% cap on credit card interchange fees. When the regulations came into force, the UK Cards Association said it "welcomed the government's measured application of the regulations" and called for "any savings to be passed on to consumers in the form of lower prices."

It's not yet clear what will happen as a result of Brexit, but Chris Jones, director at payments consulting firm PSE Consulting, stated that while the credit interchange will likely not revert back to its previous levels, debit transactions may migrate back to the historical fixed price approach. He said he expects modest change to the interchange fee legislation.

EU data protection
Under EU data rules passed in 2016, companies must be a lot more transparent about how they use personal data, and get your permission to use it. They must also adhere to new rules regarding protection from -- and following -- data breaches. There are heavy fines for merchants who don't follow the rules, including penalties of up to €20 million, or up to 4% of global turnover.

The new legislation has been described as huge boost for consumer rights. The regulation is law as of 25 May, 2016, but won't be enforced -- that is, no repercussions will happen -- until 25 May, 2018, giving countries time to incorporate it into their national laws.

The rules apply to all companies that trade with Europe, so it is still likely to apply to Britain post-Brexit. John Greenwood, a fraud prevention expert and marketing director of Compliance3, a consultancy that helps eradicate payment card and personal data fraud in business contact centres, says the rules will apply whether or not Britain stays within Europe after the EU referendum in June 2016.

"Europe is a single trading entity and if we are going to trade with Europe, then Britain won't be allowed to operate under completely separate data rules," he says. "British companies have got to get used to this and prepare for this."

Exchange rates
When you make overseas purchases using your credit or debit card, your provider applies a foreign currency conversion rate. This rate will be affected by the collapse in the value of the pound, and the volatility in exchange rates that are likely to continue for some time. That means overseas goods will probably be more expensive.

Tip: If you are making a purchase in a foreign country, or from a foreign country's website, opt to use your card's exchange rate, as it is usually the best rate available. Also make sure you use a card with no foreign transaction fees.

Published: 27 June 2016