Credit card providers have been accused of raking in £1 billion in profit each year by reducing interest-free periods, increasing APRs and hiking balance transfer fees.
According to a report by comparison website uSwitch.com, the ongoing credit crunch and the popularity of credit cards over personal loans have provided the perfect climate for card providers to make subtle tweaks to the small print to rip-off card users.
It estimates that the combination of fewer interest-free days, increasing fees for balance transfers and cash withdrawals, shorter introductory deals and higher purchase rates collectively brings in around £1 billion a year.
Around 36% of credit cards have increased purchase rates from 16.4% to 17.7% APR over the past year, which uSwitch says costs consumers £481 million a year. And in the last month alone, 30% of credit cards on the market have cut the average interest-free period for new customers from 56 days to 50 days, adding a further £3 million extra in payments each year.
Andrew Hagger, a spokesperson for Moneynet, believes this is an attempt by providers to profit from those who regularly pay their balance off in full.
“Card providers know that many of their customers pay back their balance each month, so it doesn’t matter what interest rate they charge them,” he explains. “By slashing the number of interest-free days however, they hope to make something from their more savvy users.”
It has also become much more expensive to transfer a balance too; uSwitch says balance transfer cards currently make up 76% of the credit card market, but 91% of all cards levy a fee for doing so, compared with just 29% three years ago. With the average balance transfer fee increasing from 0.59% in 2005 to 2.79% today, it amounts to a staggering £412 million in annual revenue for providers.
In addition, the cost of withdrawing cash on a credit card has rocketed by 41% over the past three years - from 8.75% APR to 29.97% APR - causing more pain for those who use their cards abroad.
Simeon Linstead, head of personal finance at uSwitch.com, says that providers count on the fact that their attempts to increase profits through subtle fees and charge increases will simply be met with confusion and apathy – and not action.
“As consumers are likely to only start feeling the full impact of the global financial meltdown in 2009, now is not the time to be naive when shopping around for a new credit card or lethargic when it comes to reviewing existing borrowing,” he says.
Linstead urges consumers to prepare themselves for the tough times ahead by planning now to secure the best deals and products on the market: “Consumers must remember, the more money you spend on fees and charges, the less you are paying off the actual debt.”