Credit card rates hit 12-year high
The cost of paying on plastic has hit a 12-year high, with the average credit card interest rate now 18.8%.
Back in the late 1990s, increased competition among credit card providers meant rates were cut, falling to a low of around 14.8% back in February 2006. However, since the credit crunch hit at the end of 2007, and following the impact of the recession, rates have shot up again.
According to data provider Moneyfacts, the average credit card rate was 17% in February 2007, rising to 17.7% two years later in 2009. However, this has now risen further to hit 18.8% - despite the Bank of England base rate remaining at 0.5% since March last year.
“The UK continues to suffer from a high level of unemployment and providers are worried about the increased risk of customers not repaying their debts,” explains Michelle Slade, spokeswoman for Moneyfacts. “This increased risk continues to be passed on to both new and existing credit card customers through higher rates.”
For example, MBNA has hiked the pricing on its platinum and platinum rewards card by 1% to 16.9% while Barclaycard increased the rate on its platinum simplicity card by 1% to 7.8%, according to comparison website Moneynet.
However, last April Saga cut the rate on its platinum card by 4% to 11.9% APR.
Higher interest rates won’t impact people who pay off their balance in full each month. However, if you have a balance of £5,000 but only pay the minimum amount (2.5%) each month, then you risk paying £2,289 more in interest over the life of the debt than you would have in 2006.
Since the onset of the crunch in 2007, many credit card providers have upped interest rates for existing borrowers, even if they have never missed a payment.
“Many such customers who would previously have switched to another provider are now finding it’s not so easy to do so,” says Slade. “Competitive deals for balance transfers and introductory purchases remain on offer, but card providers are being extremely selective over exactly who they accept for these deals.”
Other charges, such as balance transfer, cash withdrawal and foreign transfer fees are also rising alongside interest rates.
“Just because you sign up to a card with an attractive rate, it doesn’t mean it’s going to remain that way, with increasing numbers of customers receiving notification that their rate is being hiked even though they are adhering to the terms and conditions of their agreement,” says Andrew Hagger, spokesman for Moneynet.
Cheapest cards for purchases
|0% purchase credit cards|
|Provider||0% period||Typical APR||Interest-free period*|
|Tesco Bank||0% for 12 months||16.9%||51 days|
|Sainsbury's Finance||0% for 10 months||15.9%||59 days|
|M&S Money||0% for 10 months||15.9%||55 days|
|Halifax||0% for nine months||15.9%||59 days|
|Lloyds TSB||0% for six months||11.9%||0 days|
Source: Moneyfacts 15/02/2010
|Best low-purchase credit card rates|
|Provider||Typical APR||Interest-free period*|
|Lloyds TSB||11.9%||0 days|
|The Co-operative Bank||12.9%||59 days|
|Capital One Bank||14.9%||56 days|
|Source: Moneyfacts 15/02/2010
* This is the time you have to pay the balance before interest is charged
|Best cashback credit cards|
|American Express||n/a||19.9%||* 5% for three months (£2,000 annual spend)
* 0.5% (up to £3,500)
* 1% (£3,501 - £7,500)
* 1.25% (over £7,501)
|Bank of Ireland||0% for
|17.9%||* 0.5% (£15,000 annual spend)|
|Capital One Bank||n/a||19.9%||* 1% per year|
|Egg*||n/a||17.8%||* 1% per year (£500 - £20,000)|
Source: Moneyfacts 15/02/2010
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.
Cashback credit cards
These reward you with a small percentage of cash back on your total spend on the card, either each month or annually. Cashback cards carry high APRs and ONLY work if you pay your balance off in full every month. If you miss payments and have existing credit card debts, leave these well alone.
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%.
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.