Credit card rates hit 13-year high
A report by Moneyfacts shows that borrowers with £5,000 debt on their card, who repay the minimum each month, will now repay an additional £2,360 over the life of the debt compared to February 2006.
The comparison website believes the increase is partly due to new regulations that came into effect earlier this year which now require all credit card companies to use customers' repayments to clear their most expensive debts instead of the debt with lowest interest rate (so called negative payment hierarchy), which was common in the past. This means additional costs for credit card companies.
Michelle Slade, spokesperson for Moneyfacts, says: "Since the beginning of 2011 most card companies have moved to a positive order of repayments. This dent in their revenue stream is likely to mean customers will continue to see rates rise rather than fall."
In the past it was also easier to switch cards, but now providers are more selective when giving out cards with competitive 0% transfers and purchase deals.
Another fallback of these deals is that they are usually only for a limited time so many people benefit from them, then get stung when the offer period ends and their APR rate rockets.
That said, if you have a credit card with a massive APR see if you can find a better deal elsewhere. Many providers offer 0% balance transfer deals for around a year (so make sure you pay off your balance within that period to avoid getting stung by a hefty interest rate), and while you'll probably have to pay a fee for transferring your balance of around 3-5%, it often works out cheaper.
For the best balance transfer deals on the market go to our credit card round-up.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.