Credit card rates under the spotlight
Credit card providers have been grilled by MPs over concerns that they aren’t treating their customers fairly during the downturn.
Despite 2% being shaved off the Bank of England base rate since October, rates on credit cards continue to rise. Evidence seen by the Prime Minister suggests credit card providers have hiked rates significantly, prompting the government to step in and address mounting concerns that borrowers are not benefiting from lower interest rates.
Peter Mandelson, the secretary of state for business, and the consumer affairs minister Gareth Thomas, are today holding a Summit with the credit card industry tomorrow to address concerns.
Thomas says: "The government is deeply concerned that borrowers aren't getting a fair deal. That's why we've taken swift action to bring the industry in to look at how costs are being applied to people's existing debts.”
The government is expected to force credit card companies to adhere to a new set of principles if they fail to pass on lower interest rates. These could include interest rate rise caps, tougher lending criteria and rules to ensure providers offer support to borrowers struggling with repayments rather than simply hitting them with extra charges.
Louise Bond, personal finance expert at uSwitch.com, says credit card companies have been getting away with their poor treatment of borrowers for too long.
In the past month alone, both HBOS and Abbey have increased their standard purchases APRs. Moves such as these mean APRs now stand at an average of 17.03%, up from 16.4% last year.
But Bond is concerned that even if interest rate rises are capped, borrowers could still lose out.
She says: “If the meeting results in providers being compelled to put an end to this culture of continuous rate increase, then they will simply seek to recoup their losses elsewhere through other fees and charges.”
According to Bond, one area at risk is the balance transfer market.
“There has been much recent evidence of just how providers introduce revenue-boosting small print tweaks at the expense of the consumer,” she adds. “In an attempt to redress the costly headache of savvy rate tarts, providers have implemented steady increases in balance transfer fees which currently generate close to £412 million worth of revenue.”
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.