Sub-prime credit card applications continue to rise

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In 2009, a million Britons applied for a Vanquis credit card, the equivalent of 2,700 applications every day and itself a 2% increase on 2008's application rate.

With small credit limits and high APRs sub-prime cards tend to be unsuitable for anything other than very short-term borrowing or repairing a damaged credit history, as we explain here.

Yet Vanquis' results reflect a growing trend.

As mainstream lenders close their doors, sub-prime is increasingly the only option for credit card holders with what are now considered 'poor' credit histories or no history at all.

Some larger credit card providers such as Barclaycard have even followed into the market, broadening their product range to reflect much tighter credit acceptance criteria.

Sub-prime credit cards typically consist of a low credit limit - half of all Vanquis credit card holders have a limit of just £250 - and a high APR of around 30%.

In addition, since credit card providers are now only obliged to offer their advertised rate to 51% of applicants many sub-prime credit card providers are, in reality, extending much higher interest rates of up to 60% APR to most customers.

Slim chance of acceptance

"Through continuing to focus on the needs of our customers, we have been able to expand the flow of credit to consumers whilst continuing to lend responsibly," Peter Crook, Chief Executive of Provident Financial, said of the company's strong 2010 results.

That's reflected in the fact that, even though these products are marketed at those with poor credit histories, the chance of acceptance remains slim.

Just one in five of those applying for a Vanquis credit card have been successful in the past year.

In October 2010, the approval rate for the past year was even lower than that: just 18%.

Similarly, in November 2010, the aqua credit card, issued by sub-prime lender SAV credit, announced that it's approval rate for the past year had been just 11%.

Those low acceptance rates haven't stopped sub-prime lenders from making a profit, however.

Vanquis' latest results revealed a near-90% increase in pre-tax profits over the past year, to £26.7m. In 2009, it made £14.1m.

But profits for providers offer little succour to consumers facing being turned down from the mainstream's lenders of last resort.

Rule changes

Little wonder, then, that the past few years have also seen some lenders bring in rule changes to improve applicants' lot.

In November 2010, for example, the aqua credit card made it easier for those without a UK credit history to be accepted.

SAV credit estimated that the approval rates for the card would increase by more than 30% as a result of the change: taking their average approval rate from 11% to more than 14%.

Similarly, in September 2010, the Capital One Progress credit card improved its applicants' prospects by offering a lower rate 'for life' to those with exemplary repayment behaviour.

The card had always reduced their users' interest rates over time but previously the lowered APR was only a special offer, at the end of the final tier of reductions it'd shoot back up again.

As a result of the change, Progress credit card holders were entitled to keep their lower rate and were also less likely to lose the reduced rate as a result of mistakes.

Whereas previously going over the card's credit limit or missing a payment would result in the interest rate increasing to the starting rate permanently, the change meant that making a mistake only led to a freeze on the current APR and cardholders were still eligible for further rate reductions after a period of six months.

Lyndsey Burton, founder of Choose, warned that consumers would still have to use the card carefully after the change.

"Anyone looking to take out this card would still be best off doing their best to keep their monthly balance repaid in full," she said.

"While this interest rate does reduce it still starts off very high and the annual rate only reduces by 2% every 6 months - which on a balance of £1,000 equates to a monthly saving of around just £1.40."

Nevertheless, such changes clearly show that sub-prime lenders are making some attempts to make their market more consumer friendly, a blurring of the lines which could be at the root of the increase in applications.

Even so, however, high costs remain a concern with sub-prime credit products.

"For some people, high-cost credit provides a vital lifeline that allows them to meet unexpected costs when they otherwise wouldn't be able to," a spokesperson from the Consumer Credit Counselling Service, a charity that offers free advice to those in debt has said.

"The key to using these products is to know what you are signing up for when you put your name on the dotted line, and to budget to pay back your balances in full each month whenever possible, to negate the effect of the interest rates."