Glossary and abbreviations

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Glossary and abbreviations

Glossary

0% purchase offer A promotional offer that allows consumers to spend on their card without incurring interest for a specific period of time.

0% balance transfer offer

A promotional offer that allows consumers to transfer an outstanding balance from one credit card to another and not incur interest on the transferred balance for a specific period of time, usually in return for a fee that is added to their balance.

Account balance

The amount of borrowing attributed to an account, at a point in time, which is owed to a credit card provider. It includes any fees, charges and interest incurred as well as the principal borrowed.

Account-level data

Account level data, unless otherwise specified, refers to the data we collected from eleven credit card issuers. Here we collected information on over 1 January 2010 to 31 January 2015, on consumer details at the point of origination, monthly account activity and product features.

Acquisition or distribution channel

The medium used by a credit card provider to get their customers. For example, customers may make applications online, such as price comparison websites, online marketing, internet search and credit card provider websites, or offline through direct mail, telephone, branches or face-to-face marketing.

Affinity or co-brand partners

Typically charities, membership groups or commercial businesses who are not directly involved in issuing credit cards or processing transactions but lend their brands and give access to their customers or members to card issuers in return for a share of revenues or profits.

Affordability

Borrower-focused elements of creditworthiness, and in particular the customer’s ability to make repayments as they fall due (or in the case of open-end credit such as a credit card, within a reasonable period) without an adverse impact on their financial situation.

Annual or monthly fee

A flat fee charged to customers for holding a credit card account which are unrelated to their use of the product.

Application Programming Interfaces (APIs)

Rules that allow pieces of software to interact with each other and exchange data.

Arrears

A consumer is considered to be in arrears if they have failed to make the required minimum payment on their account in one or more statement cycles and have yet to rectify this.

Balance transfer

A balance transfer is when a customer transfers all or part of the balance outstanding on one credit card product to another credit card product. A fee is typically charged and added to the transferred balance.

Base curves

A collection of graphs depicting estimates of each aspect of the ‘average’ consumer’s behaviour over the lifecycle of their card (for example, active balance, revolve rate, profit). These are typically based on a group, or cohort, of consumers who have all taken out the same credit card during the same month.

Cashback

A reward offered on some credit card products which provide consumers with a percentage of their card spend back as cash. This is typically credited to their statement either the following month or on an annual basis.

Charged-off

Charged-off refers to debt that issuers have deemed unlikely to be collected and that they have written off on their balance sheet. Consumers whose accounts have been charged-off have not been relieved of their repayment requirement, and charged-off accounts are often pursued via collection processes.

Consumer re-pricing

This refers to the changing of an interest rate on the account after it has been opened. This may be to reflect changes in the consumer’s behaviour (risk-based re-pricing) or in the economic, regulatory or competitive environment (portfolio-based re-pricing) or to induce the consumer not to switch away from the product (retention-based re-pricing).

Credit builder products

Credit builder products are offered to higher risk consumers who are looking to build or improve their credit history.

Credit limit

The maximum amount of credit that can be drawn down by the customer.

Credit limit increase

Where a credit card firm raises the credit limit associated with a credit card account.

Credit reference agencies

Collects information about consumers’ financial standing to inform the decisions of consumer credit firms.

Credit limit utilisation rate

The amount which a consumer borrows on account as a percentage of the maximum amount of credit the card provider has agreed to lend (i.e. the credit limit).

Credit risk

The likelihood of a consumer defaulting on their credit card account.

Creditworthiness

The assessment required by CONC 5.2 (before entry into a credit agreement) and CONC 6.2 (before any significant increase in the amount of credit).

Cross-subsidisation

For the purposes of the credit card market study we define cross subsidisation as the sale of one set of goods or services at a loss enabling or increasing the sale of another good or service, or where profits from one group of consumers are used to cover the losses from another.

Default

When the customer is past the contractual due date by more than 90 days and the lender reasonably considers that they are unlikely to pay.

Default fees

Typically fees charged for late payment, over limit or default.

Differential pricing

Where some firms offer consumers applying for the same card different prices or promotional terms based on their risk profile.

Dormant

An account with no balance and no transactions or fees over a period (typically the last three months).

Framing effects

As people have limited attention, framing can determine what and how information is processed. Even when the economic benefits of particular choices are identical in two situations, consumers may make different choices depending on how the decision problem is framed.

Interchange fee

These fees are paid from the merchant acquirer (the merchant’s bank) to the card issuer (the cardholder’s bank), as a percentage of each transaction made by the card-holder and form part of the package of fees that merchant acquirers charge to merchants.

Interest grace-period

The interval between the date of a purchase and the payment due date. No interest is charged during this interval if the customer pays the entire balance in full by the payment due date and is not carrying a balance from a previous period.

Low-rate products

A credit card product that offers consumers an on-going lower interest rate, typically without any promotional offers on either balance transfers or purchases.

Market questionnaire

This refers to an industry questionnaire which 24 firms responded providing us with extensive information about the supply-side of the market, including their business models and product details.

MiData

A government initiative under which customers are able to upload their usage data for analysis and get an instant answer to whether or not they would be able to save money by moving to a different account.

Minimum payment

The minimum amount a consumer is required to repay on their account for a statement cycle.

Monolines

Firms which only provide credit cards.

Net interest income

The revenue earned by credit card firms from interest paid by card holders on their accounts balance, less the cost of funding borrowing by consumers. The term can also refer to the difference between interest earned and interest paid on borrowing by consumers.

Open-end running accounts

Accounts which enable the consumer to draw down money from time to time, up to a credit limit, with subsequent repayments refreshing the amount available, and with no fixed or maximum duration.

Over-optimism bias

Refers to an overly positive general outlook towards future matters for individual economic decision-making that a person has, particularly for credit card use in this context.

Present bias

Refers to the situation where decision-maker's preferences change over time, in such a way that they place significantly more emphasis on the present than in the future.

Purchase products

Purchase products typically have an introductory 0% interest offer on new purchases for a defined period of time.

Quotation searches

Where borrowers are able, before submitting a full application and when shopping around, to get an indication of the price and terms which they will be offered (but not necessarily an indication of eligibility) without a footprint being left on their credit files which could impair their credit rating.

Repayment term

The time taken for a consumer to fully repay a credit card balance.

Revolve rate

The proportion of outstanding balance that attracts interest income.

Revolvers

Consumers who maintain an outstanding balance from one period to the next, often paying less than the full repayment amount on their credit card. As a result they are charged interest on the borrowing.

Rewards products

Reward products offer consumers benefits, discounts or other rewards based on their credit card usage.

Scorecard

A scorecard is a set of weights that are attached to the pieces of information held on each consumer and form part of the calculation of the consumer’s credit score. Higher weights are associated with information that is a stronger predictor of default.

Standard products

Standard products are those that tend not to have long promotional offers on either balance transfers or purchases. Their main feature is the annual interest rate charged.

Statement cycle

The period in respect of which a monthly or other periodic statement is provided.

Total cost of credit

The total cost paid by a consumer, including fees, interest and charges accruing to an account, over a specified period of time.

Transactors

Consumers who use credit cards mainly as a payment mechanism usually paying off their balance in full at the end of the month thus incurring little or no interest on balances.

Abbreviations

APR Annual Percentage Rate
BTs Balance transfers
CMA Competition and Markets Authority
CONC Consumer Credit Sourcebook
CP Consultation paper
EU European Union
FCA Financial Conduct Authority
HCSTC High-cost short-term credit
OFT Office of Fair Trading
ONS Office of National Statistics
PCA Personal current account
PBT Profit before tax
PCWs Price comparison websites
PSR Payment Systems Regulator
SME Small and medium-sized enterprises