Card defaults drive up interest rates


Credit card defaults increase ratesCredit card firms are repricing deals in order to reflect the new risk environment, the Bank of England noted today.

The institution released its new "Trends in Lending" report, looking in to the current credit card, loan and mortgage markets.

According to the Bank, the difference, or "spread" between three-month LIBOR and the average new credit card rate increased in July. This means that providers are lending to card customers at comparatively higher rates than they themselves are borrowing money, when compared to the beginning of last month.

Rising card defaults caused by the credit crunch and recession were seen as having provided impetus for these changes.

"The sharp increase in spreads over the past year has coincided with increases in actual and expected defaults rates," the report stated.

Recent analysis from the International Monetary Fund has indicated that around 7% of all credit card deals in Europe will be defaulted on in the current economic downturn.

This ratio is likely to be still higher in the UK, where residents hold a higher average personal debt than most of the rest of the continent.ADNFCR-2308-ID-19322449-ADNFCR

Published: 24 August 2009