Credit card debt ‘risk based’

Many people will now find running up credit card debt more expensive because of risk-based pricing, an expert has explained.

Spokesman for finance website Moneyfacts.co.uk Darren Cook noted that before the credit crunch, getting cheap credit was very easy for people and lenders were practically “throwing credit cards through the front door”.

This changed when the credit crunch arrived in 2007 but Mr Cook noted some had expectations that cheap credit would become freely available again when the base rate plunged to a record low level.

Instead, lenders adjusted to the new economic reality by being more cautious, Mr Cook noted.

He added: “It took a while for people to understand that lenders have gone from a rate-based philosophy on their products to a total risk-based one because of the high probability of default.”

This can mean some borrowers end up paying more for their credit and those who use a lot of plastic could find this has led to rate hikes and increased credit card debt.

People keen to consolidate their borrowing may do so if their credit risk has improved recently, such as by getting a better-paid and safer job.

Reducing personal debt is as important to the economy as bringing down business and public sector borrowing, deputy prime minister Nick Clegg argued in a speech about government economic policy last week.

Describing all three as part of a “toxic legacy” of a failed economic model, he said the future should be “one built on enterprise and investment, not unsustainable debt”.

By Amy White