Egg bank has announced it will terminate the accounts of over 160,000 “high risk” credit card customers, but this is a one-off - not the start of a trend.
Egg wrote letters to 161,000 accountholders – 7% of its customer base – last week, informing them that their credit profiles had deteriorated since they signed up and that their credit cards cards would stop working in 35 days' time.
Egg has not yet given customers a date by which all debts must be cleared, but it has confirmed it is not seeking immediate repayment of balances.
The drastic decision has snowballed into a public relations nightmare for the bank, after hundreds of disgruntled Egg credit card customers claimed their credit rating was actually very good, and that their account was cancelled purely because they weren’t earning Egg enough money.
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Did Egg credit cards target the unprofitable?
If the allegations that Egg was trying to get rid of its “unprofitable” customers prove true, it would represent an outrageous gamble by the bank.
Egg might incur lower costs and levels of risk from their existing customer base, but could stand to lose massive amounts of new business (would you want to open an account at a bank where you knew your account could be cancelled at any stage, regardless of how fiscally responsible you were?).
That said, it certainly wouldn’t be the first time banks had singled out less profitable customers: MBNA recently introduced annual charges for those who rarely use their credit cards, while First Direct slapped a £10 monthly fee on customers paying less than £1,500 into their current account.
When life gives you lemons…
If you are one of those Egg customers affected, you could turn the situation into a positive by making a balance transfer to a far more competitive credit card instead.
For example, the Egg credit card only offers three months interest free on new purchases, but the HSBC credit card offers 12 months at 0% on purchases, plus 24 months at 0% on balance transfers made in the first three months. So if Egg doesn’t want your custom, there are other banks that do.
Many people are worried that Egg’s actions will be the catalyst for other banks to follow suit, terminating accounts at random. But this is more likely an isolated incident brought about by Egg’s precarious market position.
Sub prime woes hit CitiGroup hard
Egg bank was purchased last January by Citigroup, which was looking to expand its financial operations in Britain and its Internet expertise worldwide.
But two weeks ago Citigroup announced it had incurred losses of around £5 billion. Significantly, it said those losses were largely a result of exposure to the sub prime market – where borrowers have a poor credit history.
So with that in mind, it’s hardly surprising if Egg has decided to take such a hawkish outlook on lending money to their credit card customers.
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May get slightly harder for all
Of course many other banks have suffered sub prime losses too, and with the credit crunch wreaking havoc with the market it’s only natural that other banks will become skittish about who they lend to.
As proof of this, both HSBC and Barclaycard have confirmed they are turning away around half of all credit card applicants these days.
But don’t be put off. Provided you have a decent credit history, you should be able to get your hands on one of the many competitive deals available these days.
More credit card information
Egg credit card – apply online
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Capital One Platinum credit card - apply online
Lloyds TSB Platinum credit card - apply online
