With Bank of England base rates still at an all-time low, you could be forgiven for expecting that the interest we incur on our debts would also drop. It’s simple mathematics really.
Savers have been suffering for years now with the interest they receive cut to the bone. Mortgage rates, and personal loans too, have continued to fall, so why not our credit cards?
Recent figures show that over the past 12 months, the charges for credit card interest has hit a record high of an eye-watering 23% and an increase of 1.5% since this time last year.
During 2016, several large lenders significantly increased the amount many new borrowers paid for their credit card debt. The new charges, announced by HSBC for its Premier MasterCard, have gone up from 11.9% to 18.9%. Santander has pushed the APR on their 123 credit card from 16.5% to 18.4%, and Virgin Money now charges 20.9% to some new customers – an increase of 2%.
This has happened because lenders are now looking to link their rates according to risk and economic factors rather than the BOE base rate as they previously had done.
There are still a significant number of credit card deals out there offering interest-free rates, but when the period ends, lenders can increase interest rates at any time if they feel they are more at risk due to unforeseen economic changes, so borrowers must be proactive at switching their debts.
Borrowing £8,000 based on 22.8% APR would cost £2,812 in interest, which would take 37 months to pay off if a repayment of £300 is made each month. However, if a borrower chose an interest-free credit card and paid back the balance before the end of the offer period, then interest charges could be avoided altogether.
The APR is just one aspect of a credit card that customers need to consider before entering into an agreement, but there are other factors that a customer needs to take into consideration too.
The customer should decide in advance how they intend to use the card regarding balance transfers, money transfers or making purchases and then choose the card that is best suited to their needs.
There are dozens of interest-free offers available, and a shrewd borrower can keep ahead of the game quite easily by switching deals and repaying their balance by the end of the interest-free period.
But at the end of the day, with the base rate at just 0.25%, can a credit card lender really justify charges of 23%?
The answer is simple.
They don’t have to justify anything at all.