Beware the hidden cost of borrowing with plastic: Paying off part of a credit card bill does not reduce the monthly interest charge, Maria Scott reports

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----------------------------------------------------------------- Credit card interest rates ----------------------------------------------------------------- Annual percentage rate Cooperative Bank Visa 26.8 * Barclaycard Visa/Mastercard 22.9 Bank of Scotland Visa/Mastercard 22.6 Clydesdale Access 25.1 Leeds Permanent Visa 24.6 National Westminster Visa/Access 23.9 Girobank Visa 23.7 Halifax Visa 23.5 ** Royal Bank of Scotland/Access 23.5 Lloyds Access 23.1 Midland Visa/Access 23.1 Robert Fleming Visa/Mastercard (no fee) 23.1 Yorkshire Bank Visa 23.1 *** TSB Visa Trustcard/Mastercard 22.9 Firstdirect Visa 22.2 National & Provincial Visa 21.6 Robert Fleming Visa/Mastercard ( pounds 10 fee) 21.3 ----------------------------------------------------------------- *23.9 per cent if paid by direct debit. **From 1 April. ***From 15 March Note: Access operates within Mastercard network -----------------------------------------------------------------

SHOPPERS are rediscovering their taste for credit according to unexpectedly strong January figures for consumer credit issued by the Central Statistical Office this week. But shoppers should be cautious about rediscovering an appetite for borrowing on plastic.

Interest rates on credit cards have dropped recently but their margin above base rate is still wide. Barclaycard, the country's leading card with nearly 9 million borrowers, is charging an annual percentage rate of 22.9 per cent, 16.9 points above the bank base rate of 6 per cent. In October 1989, when the bank base rate rose to 15 per cent, Barclaycard was charging an annual rate of 29.8 per cent, a margin of 14.8 points, although its rate dropped to 27.8 per cent the following year after it introduced a fee for the card.

'When base rates went up, our rates lagged behind. Over time credit card rates move in line with base rates,' argues a Barclays spokeswoman, adding that Barclaycard remains a competitively priced form of borrowing.

Jean Eaglesham, a consumer finance expert at the Consumers' Association, is not convinced that credit cards are good value for money. 'We still think the rates should come down further.'

She said new charges introduced on the cards in the last two years had added to the cost of borrowing on plastic, and in a way not immediately obvious to customers.

Most cards now charge a fee, but they also charge interest on purchases from the date a transaction reaches an account, unless the customer pays the whole bill in full. Under the original system used by most cards, there was an interest-free period on card purchases which applied even if individuals did not clear their whole bill.

The new charging structure means that if you borrow pounds 1,000 on a card but repay pounds 999 of the debt by the due date, you will still end up paying interest on the full pounds 1,000 because you were pounds 1 short of repaying your full bill.

On a card charging 1.65 per cent a month interest, the bill for that pounds 999 over one month would be just under pounds 16.50, a sum the cardholder would not have had to pay under the old regime.

It is easy to see how the new system can increase the cost of plastic credit and make it an uphill struggle to clear debts. This will not be reflected in the annual percentage rate quoted to show the cost of borrowing on the card over a year.

Ms Eaglesham believes many people are paying more for their credit card borrowing now than two years ago despite reductions in rates.

'If you want to borrow, go for an overdraft that charges interest only or a personal loan,' she said.

'If you are using a card, make sure you clear the account.' It no longer makes sense to borrow on credit cards for routine purchases such as groceries or petrol.

People who could not afford to repay their whole credit card bills each month might even be better off borrowing more cheaply elsewhere to clear the debt.

Unfortunately, those looking for current accounts offering fee-free overdrafts have limited choice. Abbey National is among those that does, charging 22.4 per cent (APR), or 1.7 per cent a month, for authorised borrowing. Halifax Building Society's Maxim current account has no charges and an interest rate of 17.5 per cent (APR), 1.36 per cent a month. Woolwich Building Society's current account offers charge-free overdrafts at 19 per cent (APR).

Firstdirect's current account offers a fee-free overdraft of pounds 250. On amounts above this there is a 1 per cent charge, minimum pounds 15, and then an annual renewal charge of 0.5 per cent, again with a minimum of pounds 15.

Robert Fleming is one of the few credit card operators still offering cards that do not charge interest from the date of transaction, regardless of how much of the bill is paid off.

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