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
* This is the time you have to pay the balance before interest is charged, after the 0% introductory period expires
|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