Millions of credit card holders are being squeezed by the highest interest rates in more than a decade, according to new research.
Despite the Bank of England’s base rate being at 0.5 per cent, average credit card interest rates have risen to 18.8 per cent.
Experts said that card providers were passing on the cost of an increase in defaults caused by rising unemployment and bad debts. The charges were also a consequence of tighter Government regulation.
Any credit card holders with a £5,000 debt, and who pay off the minimum 2.5 per cent each month, will repay on average £2,289 more than three years ago.
The last time interest rates hit today’s levels was in 1999, when the base rate was 6 per cent.
Borrowers who became used to switching their debts between cards promising 0 per cent introductory offers have been affected by a sharp tightening of lending critera. Figures from the UK Payment Association found that around half of all applications for credit cards were rejected last year.
Michelle Slade, of Moneyfacts, the financial information group which conducted the research, said: “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.
“This increased risk continues to be passed on to both new and existing credit card customers through higher rates. Other charges such as balance transfers, cash withdrawals and foreign transfer fees also continue to go up, leaving customers paying more across the board.”
Thousands of customers with a Capital One, the US card provider, received letters last week warning that the interest rate on their cards would double overnight, from 8.01 per cent to 15.31 per cent. The rate charged on outstanding balances will rise from April.
Capital One blamed the poor “economic environment” for the decision, prompting fears that millions of credit card holders could be hit by a wave of interest rate increases in the coming months as banks seek to increase their revenue.
Barclaycard and Royal Bank of Scotland, the majority state-owned bank, have also increased their rates recently.
Andrew Haggar, of Moneynet.co.uk, the financial website, said: “Just because you sign up to a card with an attractive rate it doesn’t mean it’s going to remain that way.”
In April the Department for Business Innovation and Skills is expected to issue a government response to a credit and store card consultation which examined the re-pricing of existing debt. The consultation also considered whether credit card providers should ensure that customers repaid the most expensive debt first.
James Charles, Personal Finance Reporter
February 16, 2010
Source: The Times