Credit card rates hit 12-year high

Banks accused of cashing in as cost of borrowing on plastic soars
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The Independent Online

Credit card interest rates are at their highest level for 12 years despite the Bank of England's historically low base rate, analysis has revealed.

The average interest rate charged on cards now stands at 18.8 per cent, with many customers being forced to pay much higher rates still. Loan experts accused banks and credit card companies of "cashing in" on struggling borrowers after lenders were forced to cut back on late payment fees and missold credit insurance policies.

The figures, released yesterday by the price comparison website Moneyfacts, show that credit card rates have climbed by more than a quarter since falling to 14.8 per cent in February

2006 – their lowest level in the past decade. The base rate then stood at 4.5 per cent but, by the time the Bank of England's official rate stood at 5.5 per cent in February 2008, average credit card rates had climbed to 16.8 per cent.

Despite base rates falling to a record low of 0.5 per cent last March, credit card charges have continued to climb. They stood at 17.7 per cent a year ago and are at almost 19 per cent today. The UK Cards Association, a trade body, estimates that 6.4 million credit card users saw their interest rates increase between January and October 2009.

Thousands of Capital One customers have been told their rate will almost double next month, from 8.01 per cent to 15.31 per cent, because of what the company calls "the increased risk of lending to consumers in an economic downturn". The Halifax has just lifted the rate it charges some of its credit card customers by up to 5 per cent.

"Borrowers are having a tough enough time as it is at the present without greedy card providers sticking the knife in," said Andrew Hagger, of another comparison site, Moneynet.

In cash terms, lenders are clawing in a staggering amount of extra interest from people who cannot afford to pay off credit card balances, according to Michelle Slade, of Moneyfacts. "A borrower with a £5,000 card debt who just repays the minimum each month will now repay an extra £2,289 over the life of the debt than they would have in February 2006," she said.

Credit card issuers are also coining it in through other increased charges such as balance transfers, cash withdrawals and foreign transfer fees.

"Banks have reacted to losing their income they made from flogging payment protection insurance on their cards by increasing the revenue they make from other income streams," said David Black, a banking analyst at Defaqto. "As well as raising interest rates, they have increased peripheral fees for cash advances or overseas use fees and introduced new fees, such as annual charges or dormancy fees for those who end up not using their card."

Reward schemes – whereby cardholders earn points or cash every time they spend on plastic – are also being made less generous, Mr Black said.

Meanwhile, the credit crunch and recession have forced lenders to become much more choosy about the people to whom they will issue cards. This leaves many customers, particularly those with black marks on their credit histories, with little choice but to accept higher charges and rates.

"Many customers who would previously have switched to another provider are now finding it is not so easy to do so," said Ms 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."

After losing big profits from payment protection insurance, card firms are recouping money through default charges, which were capped at £12 in 2006. Borrowers also have to pay for the rising cost of fraud and banks' increasing bad debts. According to the Bank of England, credit card write-offs were £1.6bn in the third quarter of 2009.

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