UK Credit Card Interest Rates on the Rise Despite Base Rate Cut

By: MoneyFacts

Credit cards are a frequently used method of payment, but despite a record-low bank base rate, credit card interest rates are not on a downward trajectory. Credit card competition has been concentrated on interest-free credit deals, but the contest is less intense than previous years, with little change to the longest interest-free terms.

In March 2009 the base rate fell to 0.50%, but only three lenders cut their standard purchase rate within the first six months of the announcement. Now that the base rate has hit 0.25%, borrowers should take the cue to review their debts, and switch to something more cost-effective if their debts are weighing them down.

Struggling borrowers who are not prepared to still be in debt after an interest-free deal ends could easily feel trapped by a spike in monthly payments, especially as according to research by Moneyfacts.co.uk the average credit card purchase rate has now hit a record high of 22.8% APR.*

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“Borrowers using plastic are unlikely to be feeling the effects of a 0.25% cut, because the interest charged on credit cards tends to be linked to the risk borrowers represent instead. Only a small portion of lenders link card interest to base rate, so most customers won’t save any cash.

“Although interest is rising, there are still a significant number of cards offering interest-free deals that customers can compare, but they must take note of when the deal ends. Lenders can increase interest rates at any point if they feel there is more risk as a result of economic changes, which is why borrowers must be proactive at switching their debts.

“Borrowing £4,000 based on 22.8% APR would cost £1,406 in interest, which would take three years and one month to pay off if a repayment of £150 is made each month. However, if a borrower opted for the best interest-free credit card and paid back the debt before the offer ended, then they could avoid accruing interest charges altogether**.

“While there is indeed a saturation of interest-free offers available, it’s all down to the borrower to make sure they can tackle their debts by switching deals and repaying their balance as much as possible before interest applies. As a helping hand it would be great to see more providers encouraging their customers to make bigger monthly repayments, particularly if borrowers are unaware of how long their debt could hang over their heads.”

*Moneyfacts.co.uk records of the average credit card purchase APR started in June 2006.

**Credit card cost based on a £4,000 debt with a fixed monthly repayment of £150. Once the remaining debt reaches £150 or less, a minimum payment of 1% of the debt plus monthly interest or £5 per month is made, whichever payment is higher. Based on 22.8% APR it would take three years and one month to clear the balance, with £5,406 repaid in total. The best introductory 0% interest purchase credit card is shown in the table.

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