The rise of the credit card annual fee

With the credit crunch repercussions continuing to wreak havoc, could we soon be charged for having a credit card?

In many respects the credit crunch has had a good effect on a lot of us.

Rather than borrowing money on credit cards to pay for luxuries, we're realising what is important and either saving up or going without.

We're valuing the simpler things in life, and the urge to "keep up financially" with family, friends or neighbours seems to have declined. And for many of us just hanging onto our jobs can be enough to make us feel fortunate.

More of us are prioritising paying off credit card bills and mortgages over upgrading cars or going on swanky holidays as we try to "batten down the hatches" for potentially harder times ahead. And this may be a wise move.

Precious Plastic Report 2009

Accountancy firm Price Waterhouse Coopers (PwC) has just released its annual "Precious Plastic" report which comments on consumer credit in the UK - and it doesn't make for happy reading.

It highlights the fact that due to bad debts in the credit card sector (£3.2bn was written off in 2008), lenders are being choosier than ever regarding whom they will lend to.

Indeed, while in 2008 we saw 6% growth in unsecured lending (the report reckons one in four pieces of junk mail was a pre-approved credit card application!), this has remained constant at £230bn in 2009; credit card borrowing fell by 3% and the number of cards issued fell by 8%. Yikes.

The rise of annual or monthly fees

In some ways this all sounds very positive - in addition to card companies choosing to issue credit to fewer (and "more credit-worthy") people, consumers are also making a stand and refusing to take on more debt.

However, the report also revealed that the average borrowing per card has risen by 5%, and has surpassed £1,000 for the first time. And with rising unemployment, pay freezes and pay cuts taking their toll, bad debts are expected to rise dramatically, meaning that lenders are likely to try and claw some of this money back by raising borrowing rates and charging credit card-holders annual or monthly fees.

Indeed, credit cards may become an expensive luxury in themselves. Ouch!

There's more...

Of course, credit card companies have come under the scrutiny of the government in recent months, too.

Not only has the government published proposals demanding that lenders stop increasing interest rates and spending limits without agreement for existing cardholders, it also wants minimum monthly payments to be increased, in order for debts to be repaid more quickly.

What's more, it's called for an end to my biggest bugbear - negative payment hierarchy. This sneaky money-spinner, which is employed by nearly all card providers, means the money we pay towards our credit cards each month is used to repay our cheapest debt first, instead of the most expensive - which of course means we pay more in the long run!

The verdict?

Credit is clearly likely to get harder to come by in the next few years. Let's face it, lenders are hardly there to help the public - their priority is to turn a profit and a big one at that. And the people that will suffer most are likely to be the young and those on low incomes who may be forced to turn in other directions for much needed credit.

Indeed, if the PwC report is correct and lenders do start charging annual fees, it will certainly convince more of us to choose our debit cards rather than credit, which could be a good thing to help us keep our spending under control.

In the meantime, here are a few things we can all do to prepare ourselves and create a firm base for our family's finances.

Create an emergency fund

If you don't already have one, aim to create a cash cushion of around three month's income. Save it in an easy access savings account so that you can easily get your hands on it should the worst happen and you need some cash to tide you over for a while.

Live within your means

This is vital and something we should all ensure we can do - make sure that your spending doesn't exceed your income. Take a bit of time and create a budget - find out how in Six steps to saving big and start squirrelling any extra away.

Protection

Something else to consider is protection should the worst happen. Life assurance is an obvious recommendation if you have dependents, but other types such as income protection or unemployment insurance can be reassuring if you are concerned about your job.

Keep an eye on your credit record

Finally, if you do need to apply for credit, be it a credit card, personal loan or mortgage, you'd obviously prefer not to be declined. And as lenders use credit reference agencies to find out how great a risk you are it's worth keeping an eye on your credit record yourself.

It's worth applying for your credit report every six months from the three main reference agencies: Experian, Equifax and Call Credit (it should cost as little as £2). This way you'll be first to spot any inaccuracies that may cause you to be declined credit in the future. And you can apply for a free credit report from Experian here.

Use lovemoney.com to boost your savings

If you need a bit of a nudge to get into the savings habit, lovemoney.com can help.

First, adopt this goal: Build up an emergency savings pot

Next, watch this video: How to save when you've got no money

And finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

More: The secrets of your credit rating | Protect your credit record