More penalties for credit card customers
Credit card customers who have a balance of just 1p face being charged interest of 10,000% in a further sign that banks are penalising good borrowing habits.
Currently, the majority of banks impose minimum interest charges, normally of 50p. This means that customers who pay off their balance but leave a very small amount, say 1p, will see this topped up to the minimum charge by the credit card company.
Citibank has now caused controversy by informing its 650,000 customers that from 1 May its minimum interest charge will increase from 50p to £1. This means that customers with balances of just 1p will be charged nearly 10,000% interest on their bills.
The move comes just a few months after Egg, which is owned by Citibank, withdrew credit cards from 161,000 of its customers who it claimed presented a higher degree of risk. However, it later emerged that many affected customers had never missed a payment – leading to allegations that Egg was penalising “good” but unprofitable customers. It denied this was the case.
Steve Willey, head of credit cards at moneysupermarket.com, says the credit crunch is forcing credit card companies to recover their costs.
He said: “Rather than make big statements, many are introducing little changes like putting up minimum interest charges and the cost of spending abroad. The increases are small but they add up.”
According to Willey, interest rates on credit cards are also under pressure. “Headline rates and promotional offers like balance transfers haven’t changed much since the credit crunch. But some providers are recouping their costs by putting up rates for existing customers and terminating promotional offers if customers miss just one payment.
“Customers applying for, say, a 12 months interest free balance transfer card are also finding they are only being offered 0% interest for nine months.”
Minimum interest charges were introduced a few years ago by Barclaycard and Halifax, which charge £1 and 50p respectively.
Willey added: “We are always pushing for transparency with credit card charges, but providers adding little charges like this make it hard as they aren’t included in APRs.”
A spokeswoman for Citibank said the change will only impact a minority of customers.
Table of minimum interest charges:
|Credit card provider||Minimum interest charge|
|Bank of Scotland||50p|
|Citibank||50p (increasing to £1 as of 1 May 2009)|
|Correct as of 04/04/08|
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.