Moneyadviceforu

As the crunch goes on, lenders are rejecting applications - and mysteriously dragging their feet over some sub-prime loans.

Banks and building societies are set to tighten their belts further in the wake of the global credit crunch, making it increasingly difficult for borrowers to be approved for mortgages, loans and credit cards.

A series of reports last week suggest that financial institutions will feel the squeeze on their balance sheets well into next year - a squeeze more prolonged and more damaging than had previously been thought.

Over the past month, mortgage lenders have withdrawn 40 per cent of their sub-prime mortgages - loans made to borrowers with poor credit histories - and 16 per cent of their standard home loans.

Many of those standard loans were aimed primarily at first-time buyers who were stretching their finances to afford a home.

The second quarter of 2007 saw a continuation of the UK consumer credit market’s poor performance, a trend that began in 2005. In particular, high levels of consumer debt and a lack of consumer confidence hampered new business levels. Moreover, interest rates remained high.The majority of product lines struggled in the second quarter of 2007. This is particularly true of unsecured personal loans, which have performed poorly since mid-2004. The credit card segment continued to see a weak performance, but Q2 2007 was stronger than Q1 2007. On the other hand, overdrafts put in another strong performance.

Lending will be affected in the short term as a result of the global credit crunch. Indeed, in response to the crunch and a lack of funds on the money markets at low rates, lenders are beginning to raise their prices. Moreover, many lenders will implement stricter criteria and reduce exposure to the sub-prime and non-standard sectors.

Millions of UK consumers are likely to switch their credit card provider over the course of the next 12 months, according to a study commissioned by Abbey recently.

The average amount of money expected to be transferred by credit card users in this way is around £1,710 and it is anticipated that more than 6.5 million people will make the switch during the coming year.

Interest free balance transfers periods are thought to be the biggest attraction for credit card users looking to switch providers, followed by cashback offers, Abbey reports.

Close to 29 per cent of prospective credit card switchers told the financial services firm that they were looking to benefit from a period that they would not have to pay interest on new balances, while six per cent wanted a credit card that offered more “kudos”.

Roger Lovering, managing director of Santander Cards, said: “These figures just show the intense competition in the credit card market.

“With £11 billion at stake, it’s the credit card with the best deal that wins.”

Abbey revealed recently that UK consumers intend to borrow around £1.4 billion to fund cosmetic surgery procedures of various kinds.

Fraud on UK credit and debit cards has risen again, driven up by the use of counterfeit cards in foreign countries.The banking payments body Apacs says fraud abroad rose by 126% in the first half of the year, compared with the first six months of 2006.

That in turn drove up losses due to all credit card fraud by 26% to £264m.

Apacs says fraudsters are being forced to copy stolen cards and then use them abroad because the chip-and-pin system has made fraud in the UK harder.

“These figures show how the fraudsters have changed tack,” said Sandra Quinn of Apacs.

“A couple of years ago they were mainly stealing cards and card details for use in UK shops and cash machines.

“But today, because of chip-and-pin, they have been driven overseas - using fake magnetic stripe cards specifically in countries which have yet to upgrade to chip-and-pin,” she added.

Changing patterns of fraud

This latest trend appears to be reversing the drop in overall card fraud seen in 2005 and 2006.

Last year, losses suffered by financial institutions, retailers and individuals fell by 3% to £428m.

But as well as a surge in the use of counterfeit cards abroad, there has a been a rise in losses from fraud where the card is not present, such as online, phone or mail order transactions.

These have shot up by 44% to £137m in the first half of the year.

Apacs argues that this has been driven by the increasing volume of internet shopping.

The House of Lords is to make a decision with regards to credit card refunds for customers when they use their cards to make purchases abroad and goods are either damaged or not delivered at all.

Under the Consumer Credit Act the same level of protection applies as when goods are purchased in the UK, which means that customers are protected on purchases of between £100 and £30,000. However, this is being challenged by UK banks, with Lloyds TSB leading the argument against this level of protection on goods that are purchased from other countries.

There have already been High Court and Appeal Court hearings over this issue, and the banks are now asking for a final decision from the House of Lords. Banks claim that the system is unfair, and that they are being used as insurers for millions of suppliers around the world about which they actually know nothing.

Section 75 of the Consumer Credit Act, which came into force in 1974, states that credit card companies are responsible, along with the supplier, if goods bought on the card are damaged or not delivered. However, according to some industry officials there is confusion when it comes to goods that are purchased from another country, whether this is in person or via the Internet.

One official from the British Banker’s Association stated: “Clearly it is far more difficult for the lender, who can obtain redress in turn from the supplier, on the borrower’s behalf effectively, to do that overseas.”

One legal expert added: “More and more people are discovering those rights, and more and more credit card companies are becoming a little more worried about fraudulent clams.” 

New fraud-prevention technology has made credit card crime more difficult in the U.K., but it is increasing in other countries that have not adopted “chip-and-pin” safeguards. Chip-and-pin credit cards are cards containing electronic chips that contain the information otherwise found on magnetic strips.According to the Association of Payment Clearing Services (APACS), the U.K. clearing service, credit card crime in the U.K. dropped 4 percent in the first half of this year, compared with the first six months of 2006. However, fraud on UK-issued cards, primarily in the U.S., rose 126 percent during that time. Chip-and-pin is not accepted universally, so cardholders’ names and account numbers, expiration dates, and security codes are still stored on the magnetic strip of a credit or debit card, as well as on the microchip.

Criminals are copying the data on the strip to create a fake card that is then used in a country that has yet to upgrade to chip-and-pin technology, the BBC reported. All European Union members plan to upgrade by 2010.

Fraud patterns are changing. Last year, losses suffered by retailers, credit card users and financial institutions fell by 3 percent. But this year the numbers are rising due to the surge of cloned cards in the U.S. and elsewhere, along with a 44 percent increase in online and telephone fraud for the first half of this year, reported.

The good news in the U.K. is that online banking fraud is down, thanks to chip-and-pin and other security measures, as are losses from stolen cards being used to withdraw money from cash machines, which is down by 57 percent. When it comes to transactions where the cardholder is present, fraud has fallen 11 percent, FinanceWeek
reported.

The U.S. has overtaken France as the number one place where fraudsters can convert U.K. credit and debit card details into cash, according to a U.K. banking trade group.To blame is the absence in the U.S. of “chip-and-pin” technology, where credit and debit cards with an embedded microchip are authenticated with a PIN (personal identification number) during purchases and cash-machine withdrawals, said Jemma Smith, spokeswoman for the Association of Payment Clearing Services (APACS).

As a result, fraud involving U.K. cards overseas jumped a staggering 126 percent for the first six months of this year over the same period last year, according to the latest figures from APACS, released on Wednesday. On a brighter note, domestic fraud conducted during face-to-face transactions fell 11 percent, the group said.

Criminals often commit fraud by copying the magnetic stripe on the back of a card and obtaining a person’s PIN. They do this by installing “skimmers” — unobtrusive devices attached to a cash machine that read a person’s card details, as well as using small cameras to capture PINs, Smith said.

But most U.K. banks block transactions on cash machines with cards that lack the microchip, which prevents someone from making a fake card with the magnetic stripe details captured from the skimmer, she said.

The U.S., however, has not deployed chip-and-pin technology, so criminals are capable of withdrawing money from cash machines there. In 2006, U.S.-based fraud using U.K. cards amounted to $34 million, Smith said.

Credit card users have been warned that instances of fraud relating to cards issued in the UK but used abroad are on the increase.

According to the UK’s payment association Apacs, fraud affecting British consumers while they are outside the UK has been increasing rapidly and rose by as much as 126 per cent during the first six months of this year.

And despite the fact that credit card fraud was reduce by four per cent in the UK during the same period, Apacs is keen to see British consumers take steps to protect their financial details more effectively.

Sandra Quinn, director of communications at Apacs, commented: “A couple of years ago [fraudsters] were mainly stealing cards and card details for use in UK shops and cash machines, but today… they have been driven overseas.”

“The banking industry also continues to work with law enforcement, card accepting businesses, the Home Office and organisations such as Crimestoppers to help deter and prevent the fraudsters,” she added.

Figures released by Apacs recently show that a record £321 billion was spent using credit and debit cards in the UK during 2006.

A recent report has shown that many consumers that use credit cards are still confused or even unaware with regards to the order in which the balances on their credit cards are repaid from the repayments that they make.

This is an issue that does not affect those that repay their card balances in full at the end of each month, but does affect those that make smaller repayments on their credit cards, often costing them a small fortune in additional interest.

Most credit card companies apply repayments to the balances with the cheapest interest rate attached rather than applying them to transactions in terms of date order. This means that balances with higher interest rates are left untouched for longer, and continue to rack up interest at extortionate rates in some cases.

The issue has already been brought to light in the recent past by campaign groups within the UK, but despite highlighting the issues these groups state that the repayment allocation of credit card balances is still causing confusion.

Because of the order in which repayments are allocated on credit card balances, campaigners state that even the best deals may end up being costly to credit card users that spread their repayments. These groups are calling for more transparency when it comes to providing information to credit card users about the order of repayment allocation.

One official stated: “With a complex issue such as order of payments, providers have a duty to explain clearly to consumers how the way payments are allocated impacts on their efforts to decrease their credit card debt.”

This method of repaying the cheapest balances first is known as an adverse order of repayments, and is used by many credit card companies in order to make additional money from customers in terms of interest.

The UK’s payment association Apacs has launched a new guide aimed at helping young consumers manage their credit card spending more effectively, it has emerged.

Around 86 per cent of UK consumers aged between 18 and 24 have either a debit or credit card, according to Apacs and the association is keen to see young Britons gain a better understanding of their personal finance options.

In addition to a credit card users guide for young people, Apacs has also made available a similar publication for parents, with the aim of helping them offer worthwhile financial advice to their sons and daughters.

“Young people are spending ever-increasing amounts of money and it is therefore vital that they make a considered decision before choosing which product they use,” said Sandra Quinn, director of communications at Apacs.

“Being able to manage their personal finances is one of the most important life skills a young person can acquire, and these guides give both young people and their parents a useful introduction to some of the issues that they will face.”

Earlier this year, Apacs revealed that UK consumers are now spending more money than ever before on their debit and credit cards.