Editorial – Giving Credit Where It’s Due

As the global credit crunch steamrolls along, the average observer might be forgiven for thinking that, somewhere along the line, ideas about borrowing and lending have gotten strangely turned around?especially when it comes to U.K.-based bank Egg.

In February, the Internet bank sent letters to more than 160,000 of their customers informing them their Egg credit cards had been cancelled. As the BBC reported, Egg cancelled the cards because they considered those customers ?high risk.?

But it was soon the company that had egg on its face: as astonished customers began trading stories, it seemed that, for most of them, their fast repayments were the only risky business for the bank. By not racking up monthly interest charges, they weren’t generating enough profit. (Egg denies this is the reason, yet a spokesperson told the Guardian that, even if affected customers with ?decent credit ratings? are proven to be low risk, they won’t be offered new cards.)

As one angry customer told the BBC, she and her husband are ?retired, no mortgage, no debts? and ?always paid the balance off in full each month.? Her check with a credit reference agency confirmed that her credit rating was ?excellent,? and enough customers have reported similar stories that some MPs have called for an investigation by the Financial Services Authority.

Perhaps the most alarming fact, though, is that some genuinely high-risk customers are being rewarded. As one financial website reports, ?Other Egg customers who were heavily in debt wrote on internet message boards that their credit limit had been increased.? Which has to make anyone with an ounce of common sense wonder just what Egg is thinking, even as economies around the world are stumbling under the weight of credit woes.

In the U.S., the economy hasn’t just faltered but is on the verge of a recession, largely a result of the subprime mortgage debacle (including option adjustable-rate mortgages, which allow borrowers the option to pay less than the interest and principal due every month).

In Canada things are better, but the fallout is being felt. CBC News reports that economic growth is expected to ?grind to a near halt in the second quarter of the year.?

Back in the U.K., home of Egg, things are just as shaky: as many as 1.4 million people are facing a ?steep rise in repayments? as their short-term, fixed-rate mortgages come to an end, and key players in the mortgage industry have met with government officials to try and stem the expected flood of repossessions.

Which makes Egg’s decision all the more puzzling. A healthy economy is a balance of risk and surety. A certain amount of loss is part of doing business, but banks (and economies as a whole) also rely on certain sectors to remain stable. Even if Egg and other lenders aren’t making immediate profits from cardholders who don’t carry a balance, they’re still benefitting from the financial stability of those customers. After all, people who manage their finances well?for instance, paying off their credit cards monthly?are the ones most likely to keep paying their mortgages and, ultimately, not force banks like Egg to write off billions in bad debt. To punish them for sound fiscal management is short-sighted.

When it comes to financial planning, it seems like Egg could use some advice from some of its prudent (and former) customers.