Might we soon see a big change in the way we pay for credit cards? Sainbury’s has caused quite a stir this month with the launch of Sainsbury’s Gold, a card offering what the firm calls “great, great benefits at home & abroad”, at a charge of £5 per month.
While many people will shudder at the very thought of paying a fee for their plastic, the card can be well worth the money under the right circumstances. Included in the package is annual family worldwide travel insurance covering two adults up to the age of 65 and up to six children under 16. It’ll also cost nothing to pay for goods or withdraw cash at home or abroad, and you’ll get double nectar points on Sainsbury’s shopping.
The travel cover alone could well be worth the fee if you have a big family and holiday fairly regularly – add to that the shopping benefits and you could well find it to be great value.
Paying a fee for cards is nothing new in itself: wealthier customers will be very much used to shelling out for exclusive benefits on their cards. However, the supermarket’s offering is currently the only mass-market card charging a fee.
Why, then, has Sainsbury’s chosen to break from the rest of the market?
How charges are changing
Despite what newspaper headlines may tell us, the last few years have been tough for lenders. Wholesale funding remains tight and Bank of England figures show that banks and building societies have had to write off record amounts of bad credit-card debt so far this year.
On top of that, lenders are being hit with a raft of legislation that will further impact their profitability.
With the Consumer Credit Directive applied from February 2011, and a set of more stringent capital requirements for all European lenders in forthcoming EU regulations – credit card providers’ profits will be further squeezed.
While no-one is likely to be sobbing for the banks, this does have an effect on you. Credit-card providers won’t lend if there’s no prospect of making money out of it somehow, so they’re having to get more innovative to do so.
As a result, Chris Griffiths, head of credit cards at Confused.com, believes that Sainsbury’s move towards monthly charges could well be the first of many.
“Lenders are in a position where consumers are looking for the best deal they can get, whether it is zero per cent introductory rates, rewards or other card features. The cost of these benefits isn’t insignificant, and it’s quite possible that providers will soon no longer be able to cover the expense of such offers solely through revenue from interest charges.
“To that end, a monthly or annual charge could become more widespread, or the availability of feature-rich credit cards could be limited to customers willing to ‘bundle’ their financial products - taking a credit card from the same provider that holds their current accounts or mortgage.”
Goodbye to free balance transfers?
Does that mean that we could soon be waving goodbye to the zero per cent balance-transfer deals that have dominated the credit-card market in recent years? It’s more than possible, says Griffiths.
“The zero per cent balance-transfer message is a strong marketing tool for providers to attract new business, and has proved popular with customers who have outstanding borrowing,” he says.
“However, for providers to see any real returns they need customers to keep a balance on the card after the introductory period has finished, whereby they ‘flip’ on to the interest-accruing APR.”
Griffiths continued: “With customers now being more accustomed to moving debt and opening accounts with different providers, this return becomes less likely as customers can simply look to move any remaining balance to the next zero per cent offer.”
The balance-transfer fee helps providers mitigate against a long-term zero per cent balance-transfer deals and, if profit margins are squeezed, there is a chance that borrowers could see this fee increase, find introductory periods reduced or, in extreme cases, removed completely.
If lenders are to move away from these top debt-shifting deals, then it might be worth considering your options before they all disappear. Compare credit cards with Confused.com and you’ll be able to use our free credit profiling tool, which lets you check your likelihood of being accepted without leaving a credit footprint.
