At first glance the decision of Egg to withdraw the credit facility of 161,000 “high risk” customers seems a sensible course of action.
For a number of years financial services companies have been more than happy to extend credit limits, offer all sizes of loans and provide massive mortgages as we embarked on a spend, spend, spend frenzy.
The result of this collective desire to live way beyond our means has been spiralling levels of debt.
Although the number of insolvencies unexpectedly dropped in 2007 – the first reduction in nine years – experts are warning that 2008 could see records tumble.
The UK has a debt mountain of £1.4trillion debt and borrowers, already struggling, are likely to face much higher rates as the credit crunch bites and many come off cheap fixed-rate mortgages.
Egg’s decision to withdraw the credit facility from those customers who it believes pose an unacceptably high risk does, therefore, appear to make sense. Those customers will have to continue to pay off their outstanding balances but will not have access to further credit.
Yet there is some suggestion that Egg’s decision has less to do with common sense and is more a sign of how financial companies are feeling the pinch and looking to maximise profits.
The reaction of some of Egg’s 161,000 customers who have received letters suggest the strategy is not so much targeting the high risk as the sensible ones who don’t offer enough opportunities for the company to make money.
Although the decision has left a bad taste for Egg’s customers, some analysts are predicting it could signal a tightening of the credit market with other companies imposing restrictions on customers.