Analysis: Credit card debts have grown substantially over the past few years, writes Una McCaffrey, but the Central Bank says there is 'no sense of an explosion of debt'.
Credit card debts have grown substantially over the past few years but are still some distance from an "explosion", according to a new analysis of the sector by the Central Bank.
The new report, drawn up by the Central Bank's statistics department, also finds that while competition has increased among credit card providers, there is space for new players to enter the market.
A special index used to measure competition - the Herfindahl-Hirschmann Index - finds that the market is still "highly concentrated", even though competition levels have been improving.
The index provided a reading of 2,945 in 1999, with this declining to 2,516 by 2003. A level of 1,800 signifies a "moderate" or desirable level of competition.
Further competition in the market could be expected to lead to cheaper charges for credit card users. The Central Bank has found that even though competition has only been growing slowly, the net margins achieved by credit card providers have been declining.
Net margins fell from 9.5 per cent in 1999 to 7.2 per cent in 2003, according to the analysis.
The Central Bank judges that the average gross return to credit card lenders at the moment is 12 per cent, even though the average interest rate charged on credit cards is much higher, at 17.9 per cent.
The differential is attributed to "convenience" credit card users, or those borrowers who pay off their balances in full at the end of each month without incurring any interest charges.
Data supplied by credit card companies to the Central Bank suggests that about 30 per cent of credit card balances are paid off in this way. This makes these convenience users the "beneficiaries" of the habits of those who do not pay off their bills in full, according to the analysis.
Credit card debt has surged over the past few years, growing by between 22 and 25 per cent each year in the five years to 2002. The pace of growth has been easing of late however, and was touching 15 per cent towards the end of last year.
At that stage, about €1.8 billion, or less than 3 per cent of collective disposable income, was owed on credit cards.
While this marked an increase from 1.7 per cent of disposable income in 1999, the Bank said there is "no sense of an explosion of credit card debt in Ireland".
The conclusion runs contrary to popular perceptions, which reflect the ease with which credit cards are available, the high credit limits on offer, and low minimum repayment requirements.
Concerns in the area should "not be over-emphasised", the Bank believes.
It points out that while market penetration of credit cards in the Republic is just above the euro-zone average, it remains well behind many other countries. The Republic had about 456 credit cards per 1,000 inhabitants in 2002, while the UK had 1,066 and the US had 4,361 cards.
One possible brake on the Irish penetration is thought to be the €40 stamp duty charge levied by the Government on each account. The number of cards in issue fell significantly - particularly among businesses - after the levy was raised from €19 in 2003.
