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Will Egg Credit Card Issuer Have to Stand Trial for Its Methods?

2008-02-22

The UK internet bank, Egg, will probably face an investigation into the cancellation of more that 160,000 credit cards, which will be launched by the Office of Fair Trading, UK. An inquiry wouldn't be probably launched but for the flood of complaints from customers who had their accounts cancelled regardless of their good credit standing and long history with the bank.

About seven per cent of Egg's two million customers received letters that warned them their accounts would be cancelled and indicated no sound reason for the decision. Naturally enough, the act got customers worried that it would hurt their credit files and would bar them from profitable credit card deals later on.

What's more, many of the accounts cancelled were a really profitable deal for the cardholders and the inability to take advantage of the low interest rates and various perks irritated them. With complaint letters never ending, the Office of Fair Trading is considering to take legal action.

So, what is the accusation? It has been assumed, and not without a ground, that the bank initiated the cancellation because it started to accumulate bad debt records and incur revenue losses. Bad debts, invariably accompanied by interest charges, have traditionally been the principle source of funds. But when bad credit debts grow and interest doesn't, it isn't much of a profit for a bank.

It was notably unprofitable to keep customers who always paid their balances in full each month and thus had no interest on their cards. And it was equally unprofitable to deal with constantly defaulting cardholders for whom a charge off or bankruptcy was the only way out of a mountain of unpaid bills.

So, both categories of credit consumers suffered from closing their accounts. The first category has lost its benefits and rewards, the second - its living support.

The bank, however, is settling its affairs perfectly well with average income customers who do not miss payments but who tend to carry balance from month to month - it gives great profits to the lender. Dumping credit risky customers (identified so because they do not bring much profit), Egg has made a smart and really profitable deal with those who can carry interest charges.

While, Egg has played no other trick except closing credit card deals, there are worries that other banks may come up with their own measures of avoiding bad debt. Some have already imposed flat fees on cardholders who keep their plastic for no special reason, hardly ever using it for making purchases.

Customers who always pay balances in full every month have been hit by the reductions of 0 % intro periods on their deals. Doesn't all this make us feel that faultless card users are punished whereas spending addicts living on faith of credit are encouraged to keep the pot boiling?

Let's wait and see how it all will be settled with Egg bank which, initially successful, was sold to Citibank after incurring losses of ?140 million. So far, the bank is charged with taking away cards from responsible and disciplined customers and offering them to credit risky people to make new profits from.