Bad credit down loan mortgage zero

You had to groan a little over reports that Marks & Spencer is planning to launch a big new product idea this spring. According to the Mail on Sunday, M&S is going to give the world.. . wait for it... a credit card.

The normally innovative St Michael in his infinite wisdom is going to provide his millions of customers not with a better knicker or a cheaper sock or a tastier ready-meal, but another piece of me-too plastic. You might think that this is a bit hypocritical, coming from the stores group that was virtually the last on the high street to accept the wretched things as payment.

But a pilot scheme in South Wales has reportedly gone well, and M&S is ready to roll out the credit card nationwide, complete with loyalty points and all the other gimmicks of the financial services industry Why? Because credit cards are the nearest the business world has found in recent times to a licence to print money. In the rollicking, uncertain steeplechase that is financial services, the credit card is the reliable nag that romps home year after year. Bankers have had to write off billions from unfortunate punts on junk bonds, mergers and acquisitions, share trading and other ventures. Yet that sliver of plastic with your name embossed on it has proved a gold-plated earner.

However much the credit card companies upset their customers with high interest rates and cheapskate loyalty schemes (the worst wine I've ever tasted came courtesy of a credit card promotion), the lolly keeps rolling in. The biggest player, Barclaycard, last year made record operating profits of [pounds sterling]628m, more than double the amount five years ago. This was after writing off [pounds sterling]402m of loans to actual and probable welchers.

By comparison, the [pounds sterling]16m the company doles out to sponsor the Premiership each year is petty cash. Even novices make money. Egg, the credit card business set up by Prudential, is already making UK profits of [pounds sterling]35m a year from almost two million cardholders, just three years after setting up. It is a curiously British phenomenon. On the Continent, shoppers prefer cash, cheques or debit cards. Across the EU, Brits account for two-thirds of all credit card spending. Elsewhere, consumers are more cautious.

It might seem surprising that credit cards are so lucrative. The 30 per cent-plus interest rates of the 1990s have come down to 15-19 per cent today. Banks offer long free-interest periods to woo new customers, and often lose money to people taking advantage: I know an affluent couple who have borrowed u30,000 over more than two years and, by switching providers every six months, never paid a penny in interest. And the industry is supposed to be fiercely competitive. If you are in work and of fixed abode, you will be lucky to go an entire week without receiving junk mail offering new pieces of plastic.

So why does the business remain so profitable? First, the margins are fat. Banks take deposits at 1 or 2 per cent or borrow in the wholesale markets at 4 or 5 per cent. That still gives a hefty return from lending at 15 per cent.

Second, the volumes are growing. Consumers are taking on ever greater dollops of debt, reassured by the rising value of their homes. Third, default rates are low. Though many borrowers get into difficulties, they will often transfer their liabilities to debt consolidation companies lower down the credit food chain. Above all, the credit card issuers do not just make money from lending; they also take money for processing every credit card transaction, usually 1 to 4 per cent of the purchase value.

This is the secretive side of the credit card industry -- a dark place where the competition authorities repeatedly shine their dim torches, but seemingly to no avail. The government has ignored Don Cruickshank's recommendation in his review of the banking industry three years ago that it set up a regulator -- PayCom -- to police the market. The Office of Fair Trading last month rapped MasterCard for its stranglehold over merchants, but then gave it one last chance to put its house in order.

Defaulters are the big unknown. Profits are only truly crystallised when the money is paid back. A recession and higher unemployment would force all the lenders to redo their sums. The credit card companies may all be overstating their profits by not setting aside enough money for bad debts.

Why doesn't competition bring down interest charges? Inertia and ignorance. For every interest rate "tart" who switches lenders every six months to get the best deal, there are 50 people who can't be bothered. Only 2 per cent of borrowers are on zero or low rates. Ignorance is the other friend of the banks. There are millions who borrow on plastic at 15 per cent when they could take out a personal loan instead at 10 per cent or, better still, add the loan to their mortgage at 5 per cent.

Patrick Hosking is deputy City editor of the London Evening Standard