Credit card rates hiked as holiday season gets going
MBNA has been accused of hitting its credit cards customers with unexpected increases in their APR rates, just as they are about to head off on holiday.
The US company, which issues cards on behalf of Abbey, Alliance & Leicester and Virgin, has increased APRs for existing customers by up to 34.95%.
Esther James, a credit card analyst at data provider Moneyfacts, says the move effectively doubles the 15.9% APR that MBNA advertises for new customers.
“Many MBNA customers with outstanding balances will find the APR hike unmanageable, and because it finances so many credit card deals in the UK, customers may find themselves unable to move to another provider,” she adds.
One MBNA customer told Moneywise: “I got a letter from MBNA two weeks ago informing me that it was increasing my APR from 15.9% to 26%. After contacting MBNA to complain, it agreed to revert it back to 15.9% as I was a loyal customer. However, it has since increased the minimum payment from £5 a month or 3%, to £25 a month or 3%, whichever is the greater.”
Moneyfacts’ James warns that using an MBNA card abroad will cause even further misery for holidaymakers, as on top of the APR, a foreign usage loading fee of up to 3% is applied for purchases, and a 3% cash withdrawal charge the moment a withdrawal is made.
“As it typically takes two to three weeks to apply for a credit card, MBNA’s move will catch out many holidaymakers,” she says. “This is yet another sting in the tail for customers feeling the pinch of the credit crunch."
Many of the existing customers affected by the rise will be those coming to the end of their introductory offers.
"The move will undoubtedly annoy those customers that manage to pay off their balance in full each month, but to charge almost 35% - a rate typically reserved for borrowers with real credit issues - is a kick in the teeth," says Andrew Hagger, a spokesperson for Moneynet. "Because customers' APR is not shown on statements, just the lower monthly rate, many will be unaware of just how much they are being charged."
MBNA isn’t the only credit card provider to hit customers with rate hikes. Since April, 19 credit cards providers have raised interest rates for purchases, 14 have upped the rate for cash, and eight have increased cash withdrawal fees.
MBNA was unavailable for comment.
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.
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%.