It’s rare the phrase ‘credit crunch’ is out of the media these days but what is it and how does it relate to the credit cards you have or would like to have?

What is this ‘credit crunch’?

In the early part of this decade big banks including high street names you will recognise such as HSBC, Lloyds TSB and Barclays began investing in financial packages known as Collateralised Debt Obligations (CDOs for short). Think of CDOs is as a music compilation, you buy the record because it has some songs that you like and are willing to pay for but to fill out the album the record label has included songs which aren’t so good that you certainly wouldn’t buy on their own.
CDOs are the financial equivalent – they are unrelated debts which have been packaged together, some of the debt is good i.e. the debtor will almost certainly pay it back, but some of the debt is bad i.e. the debtor is unlikely to pay it back.

This is where the now infamous America sub-prime housing market comes in. Unscrupulous lenders were giving mortgages to risky Americans who were unlikely to be able to make the payments, and then selling that debt on as part of a CDO to other financial institutions. These financial institutions weren’t aware of the high level of risk they were taking on because the rating agencies classed the CDO according to the best debt in the package rather than the worst.

This couldn’t last forever and when those people in the US stopped paying back their mortgages the big banks looked at their books and discovered the unpleasant truth; that a lot of what they thought of as safe assets where actually worth much less than they thought.

This has plunged some banks in to real trouble; notably Northern Rock in the UK and Bear Sterns, Merrill Lynch and Citigroup in the US though few if any major banks have been wholly unaffected.

OK fine, but how does that relate to me?

When lending to you via a loan, mortgage or credit card, banks don’t usually borrow money directly from the Bank of England or other central banks. It is in fact mostly borrowed from other banks at a rate know as the London Inter-Bank Offered Rate (LIBOR). Because all the banks are now suspicious that other banks may be holding back a large loss which would mean that they were unable to repay their loans, they are increasing the costs of lending to off-set these perceived risks.

That means that the money that you are borrowing from the financial institutions, for example which is owned by Citigroup now has to be borrowed from another bank, say Barclays, at a more expensive rate than previously.
What this means in practice is that APRs will increase, promotional rates such as and may reduce and the criteria used to accept you or not will become more stringent.

So it’s a bad time to get a credit card?

There have been few obvious immediate consequences of the credit crunch on the UK credit card market. did cancel the accounts of more than 160,000 customers though that would probably have happened anyway. Indeed the 0% balance transfers and purchases promotions offered by the major card issuers such as , , , and others in the fiercely competitive UK market are largely unaffected if not improved.

Depending on how this ‘credit crunch’ plays out this might continue to be the case but it if you are thinking of getting a credit card it might be wise to get one now before the big banks decide it’s no longer worth promoting such good offers when their margins are being squeezed by the cost of funds.

Many people use their credit cards as a convenient way of deferring payments from one month to the next, however if you always pay your credit card bill in full every month you can use your credit card as a small but effortless source of additional income.

Every time you spend on your Visa, MasterCard or American Express credit card the issuer e.g. Barclaycard, MBNA, Virgin etc. earn a small percentage of the money you spend - known as interchange. To encourage you to take out and use their own cards credit card issuers will often give you the customer this in the form of cash back, points or air miles.

American Express credit cards pay the issuer three times more interchange than Visa or MasterCard and so these incentives are usually most generous on American Express cards.

If you always pay your bill in full you should consider an American Express credit card such as the American Express Platinum Money Back which pays 5% cash back in the first three months and 1.5% thereafter, the American Express Nectar card which adds points to your Nectar account or the American Express British Airways Card which allows you take free flights with British Airways.

If you don’t pay in full every month the cost of interest charges will quickly erode your gains from whatever credit card rewards program you are on however if you do, you can enjoy spending your rewards courtesy of American Express!

Barclaycard Business and Computer Cab plc have announced the unveiling of the first taxi contactless payments system, at the Business Travel Show held in Earl’s Court last month.

This interesting partnership sees Barclaycard and ComCab team up to fit a ‘concept cab’ with Visa ‘wave and pay’ technology in order to demonstrate how the taxi company could offer customers a secure and efficient way to pay for low value (less than £10) taxi fares.

These new developments from Barclaycard follow the announcement last year that Barclays would be combining chip-and-pin technology for credit card payments alongside that of the Oyster Card. This card, now fully rolled out, also allows customers to pay for low-cost items in shops without having to enter a pin number.

The innovations made by Visa’s ‘wave and pay’ system could change the lives of millions of people who would like to avoid the accumulation of loose change in their pockets. The system, currently being tested by Barclays and competing banks in a range of formats, requires customers to pass a credit card in front of an electronic reader in order to make small payments.

Credit cards with promotional 0% balance transfers allow you to transfer a debt to your credit card and avoid paying interest. Normally the interest free period is around 12 months although competition among credit card issuers means that Virgin Money is now offering a card with 15 months 0% balance transfer.

When making a balance transfer there are three things to be aware of:

1. Never spend and BT on the same card - you will be charged interest on your spend which cannot be repaid until the 0% balance transfer sum is clear. This still applies if there is a (shorter) 0% purchases offer on the card.

2. Be aware of the ‘Handling fee’ which is a percentage of the total balance transferred levied by the issuer. This is added by credit card issuers to discourage ‘rate-tarts’. For larger transfers this can be a significant sum.
3. Pay or transfer your balance again by the end of the 0% period, otherwise you will pay interest at the standard rate - usually around 15% APR. This can easily reduce the money saved in the 0% period.

Follow these rules and you will be able to take a well earned break for paying interest by using balance transfer credit cards such as those on Credit Card Today.co.uk.

If you are a young person you may find it difficult to obtain credit because you have no credit history from which credit providers such as banks, building societies and credit card issuers can judge your likelihood to repay your debt.

As such, it is may be wise to take out a credit card to establish a record at a credit bureaus such as Experian or Callcredit, businesses which hold a record of your credit agreements which allow lenders them to assess your credit worthiness.

Having said this, often the most attractive promotional rates on balance transfers and 0% purchases are unavailable to young people for this very reason. You should therefore consider cards suited to the ‘thin file’ (low or no credit history) customers such as a student credit card.

Once you have a credit card it is wise to spend a little each month over the course of a year and repay in full every month. This lets the credit bureaus you are a responsible individual capable or repaying your debts.

Once you have done this, you should not only qualify for the most attractive credit cards but also lower rates on, loans, car finance and even mortgages, leading to substantial interest savings later in life.

Credit card issuers are offering ever better deals on balance transfers these days, which can only be good for the customer. However when you use your credit card for both balance transfers and spending this can be surprisingly expensive.

Essentially credit card providers insist that borrowers always repay the least expensive debt first, known as the ‘repayment hierarchy’. What this means is that if you take up a 0% balance transfer deal for 12 months and then spend on the same card in that time, your purchases will be charged at the standard rate (usually around 16%) while any repayments you make will only discharge your 0% debt.

By the time you have repaid your balance transfer you could have potentially incurred some significant interest charges.

So how do you avoid this pitfall? Simply take out a card specifically for the balance transfer deal, and then don’t touch it again! The golden rule is – use one credit card for balance transfers and a separate card for spending.

If you want a credit card to spend with, get a card with a low APR if you don’t always clear your balance, or a card with a cashback or rewards if you do. Problem solved!

Barclaycard have released a new card combining the functionality of a London Oyster card, a contactless payment system and a standard credit card.

Oyster

Sold as ‘OnePulse’, the card is being marketed heavily at Londonders due to the inclusion of a pre-pay Oyster card which can be used on the London Underground and bus network. Barclays have secured the exclusive rights for three years, to put Oyster cards on its Barclaycard credit cards and Barclays Connect debit cards.

Cashless

The other novel feature of the card is the ability to make purchases for less than £10 with out entering a PIN, simply waving it past a reader in a similar fashion to normal Oyster cards. To discourage fraud one in five such transactions will still require entering a PIN number in the normal fashion as will any purchase over £10. Currently participating merchants include off-licence chain Threshers and donut vendors Krispy Kreme. According to Barclaycard you can use ‘OneTouch’ wherever you see the wave symbol or ‘Visa payWave’ sign.

Credit

Finally as one would expect from Barclaycard the OnePulse card is also a credit card with a fairly competitive APR of 14.9% Typical and 6 months 0% interest on purchases from account opening. More information can be found at Barclaycard.