Costly credit is better than no credit at all

VANQUIS, part of Provident Financial Group, is test-marketing a credit card for people with a poor credit history. It proposes to charge interest rates of just under 50%, and the news has brought the predictable chorus of condemnation from consumer groups.

But just because the rate is high does not make it wrong. It depends on the circumstances. The starting point should be that banks and financial groups are not public-service bodies. A few are mutually owned but the majority are capitalist organisations whose purpose is to make a profit for their shareholders.

They are not, and should not be, under any obligation to lend to people who do not intend to pay the money back, nor to lend at interest rates that do not allow them to make a profit. That may seem like stating the obvious but it is a fundamental point that many bank critics, including some members of the Commons Treasury Select Committee, conveniently ignore when it suits them.

No one has a divine right to credit. It is not 'unfair' that some people can borrow more cheaply than others, any more than it is unfair that a boy racer pays a great deal more for motor insurance than a similarly experienced woman driver. It reflects commercial reality - the risks the organisation is taking in lending or insuring and the amount it needs to charge to compensate for that risk.

In any other part of the business world, it is taken for granted that different products meet different needs and have different prices. Yet when Barclays chief Matt Barrett very sensibly made that point in saying it was a mistake to borrow long-term on credit cards, he was mindlessly pilloried in the Press.

Bodies leaping to the defence of consumers do not always ask them if they want to be defended. In the US, an organisation called Household, bought last year by HSBC, specialises in lending to people with bad credit histories and charges them substantially more than it would do if they had good credit records.

But the customers by and large are satisfied. They would rather have credit on Household's terms than no credit at all. And, because the bank has systems geared to cope with the difficulties these borrowers are prone to, it is better equipped to see them through difficult times.

As a result, many such customers use a Household loan to get back on their feet and rebuild their credit ratings so they can become mainstream borrowers again.

It is not necessarily low-income people who get chronic debt problems any more than it is the sons of publicans who become alcoholics.

Why should responsible poor people be denied access to credit? And, given that often a debt default which destroys a person's credit rating is brought on by some special factor - job loss, illness, accident or divorce - which turns the affordable into the unmanageable, there is surely a strong social case for giving such people a chance to repair their lives, even if the interest rate is high.

We shall have to wait and see if all or none of this will apply in the case of the Vanquis credit card, but it should not be condemned out of hand.

Rather we should see it as a welcome move towards a world where banks are encouraged to charge different interest rates for different categories of risk, however they choose to define or assess those risks, and borrowers are encouraged to understand why it has to be so.

Costly cap

THE fuss about the £1.4m pension cap - later raised to £1.5m - seems to have died away following the National Audit Office report that fewer than 10,000 people would be affected.

But it has, nevertheless, opened up the debate in companies on how pay for mainstream executives - as opposed to board members - should be structured, and that may well lead to significant increases in overall levels of remuneration in the 'marzipan layers' below the boardroom.

This may well be another example of the law of unintended consequences. Most executives were not affected by the £1.4m limit because they were caught by the cap introduced by Tory Chancellor Nigel Lawson in 1989, which affected all but those who had been with the same employer since before then.

But, although it has made executives think about pensions and the tax consequences, they are not easily going to be fobbed off. Already, some companies have noticed increased demands for junior executive pay to reflect more of the share options, incentives and bonuses that have become a standard part of the chief executive's package.

So, like many caps before it, this one could cost employers more, not less.