How can we shuffle the pack as card rates soar?

Plastic has joined home loans as a casualty of the credit crunch. Julian Knight searches for good deals
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The Independent Online

With the UK banking system still gripped by the credit crunch, it's now the turn of card borrowers to feel the interest rate pain.

Research conducted exclusively for The Independent on Sunday by financial information service Moneyfacts reveals that a substantial number of credit card lenders are dashing to raise their rates.

Since April, a host of high-street names – including Barclaycard, Royal Bank of Scotland, HSBC, Nat-West, Capital One and the Co-op bank – have increased their cost of borrowing.

In one instance, the American Express Nectar credit card, the interest rate charged has gone up by a whopping 3 per cent from 15.9 to 18.9 per cent. All in all, across the UK credit card market, 19 purchase rates have been increased over the past three months.

"It is nearly unprece-dented to see so many providers raise their purchase rates over such a short period," says Michelle Slade from Moneyfacts. "Generally, hiking the purchase rate is considered a last resort for lenders, as they have to put this headline rate in their adverts. If they need extra cash, they will normally do other things, like increase the fees for transferring a debt from another card [the balance transfer fee] or for using the card at an ATM to withdraw cash," Ms Slade adds.

Some observers suggest the move to raise purchase rates indicates a growing desperation among lenders to shore up their shrinking profits. "Banks, as a result of the credit crunch, are short of money and can only find this cash by either cutting their costs or increasing profit margins," says David Kuo from financial advice website "Since the back-end of last year, they have been dashing around trying to increase the profit margin through less noticeable means, but they are now only left with raising the headline rate. It just shows the dire straits they are in," he adds.

And the stream of rate increases could soon turn into a flood. "If banks continue to be unable to raise cash on the international money markets, I can only see some headline rates getting higher," says Mr Kuo.

Many borrowers who have recently switched card provider could already be paying more, without even being aware of it.

"These headline rates are only the typical annual percentage rate on offer. If someone doesn't have a perfect credit record, it may be that they are already being offered a rate in excess of the headline," warns Ms Slade. "Banks have defin-itely been tightening their lending criteria."

Elsewhere, some providers have been busy cutting credit limits for riskier customers so to reduce the chances of bad debt.

"Just as happened with the mortgage market a few months ago, it's getting tougher to get a good deal. If you see a good offer then snap it up fast because there is every chance it will become oversubscribed and ultimately withdrawn," says Mr Kuo.

Tracey North from the price-comparison service suggests that people who have a large balance on their plastic should look at the 0 per cent deals available from the Halifax and Capital One.

"Both of these cards will give you a 0 per cent rate on balance transfers – in the Halifax's case for 10 to 12 months, and Capital One's 16 months, which is the longest period available. However, a balance transfer fee has to be paid."

People looking to avoid a transfer charge could opt for Capital One's low-rate credit card, launched last week. "It levies 8.5 per cent on balance transfers and new purchases made with the card, but crucially there is no upfront transfer fee," says Ms North.

Mr Kuo says that in the light of the credit crunch and the twin spectres of recession and unemployment, people with credit card debt should "move to as cheap a deal as possible and pay back what they owe as soon as practical, and avoid building up new debt".

For people looking for a low headline purchase rate, rather than to transfer a balance from another card, M&S Money, the Halifax and NatWest all offer cards that charge 0 per cent – but only for a few months. Once this introductory period is over, the rate goes up.

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