Watch out for stealthy rate and fee rises

Now's the time to check the small print on everything from your current account to your mortgage. Kate Hughes explains why

It can be tempting to imagine that the financial meltdown is happening to someone else, especially if you don't have savings in an Icelandic bank or work in the City.

But the chances are that quietly – some might say stealthily – your bank or building society has been making changes to the terms and conditions on your credit cards, overdrafts and mortgages.

Thanks to pricey lending between untrusting banks, rates and fees are creeping up and interest-free opportunities are swiftly being revoked.

UK borrowers are sleepwalking into increasingly expensive lending, while interest on current accounts is slowly being clawed back.

Credit cards

By tweaking terms and conditions, the credit card industry has generated up to £1bn over the last year, according to research by price comparison website uSwitch.com.

Some 36 per cent of credit card providers have increased the interest rate on purchases from an average of 16.4 per cent APR to 17.7 per cent APR in 12 months, costing consumers an extra £481m in additional interest. Meanwhile, nine out of 10 cards that allow a balance transfer now levy a fee, compared to less than three in 10 back in 2005. And the fees themselves have shot up by an eye-watering 373 per cent, up from an average of just £11.02 to £52.09 per transfer.

With 8 million balance transfers carried out every year, the extra cost to consumers of these fees is £412m, uSwitch says.

Then there are cash withdrawal fees. In 2005, the average interest rate for cash withdrawals on a credit card was 21.22 per cent APR. Today, this has increased to 29.97 per cent APR. This costs consumers up to £161m a year in interest.

Not even the old "56 days breathing space" rule applies any longer. In the last month, 30 per cent of the credit card market has cut the interest-free period for new customers from 56 to 50 days, costing consumers up to £3m in additional interest.

Simeon Linstead, the head of personal finance at uSwitch.com, says: "The current economic situation is the perfect climate to cultivate these subtle, small-print tweaks, and suppliers feel confident to make these changes as credit-hungry consumers are being forced to turn to them, having nowhere else to go.

"Providers count on the fact that their attempts to safeguard their margins through subtle fees and charge increases will simply be met with confusion and apathy – not action. As consumers are likely to only start feeling the full impact of the global financial meltdown in 2009, now is not the time to be naive when shopping around for new credit, or lethargic when it comes to reviewing existing borrowing. Consumers must remember that the more money they spend on fees and charges, the less they are paying off the actual debt," he adds.

Mortgage rates

Mortgage providers have been criticised recently for failing to pass on Bank of England base rate reductions to their customers, and rightly so. It doesn't sound like much, but an extra 0.5 per cent can add billions to the banks' turnover, and hundreds of pounds to a family's mortgage payments each month.

When the Bank of England did in fact cut the base rate by 0.5 per cent last month, many lenders either failed to pass on the reduction altogether or only passed on a small part of it. (See table below). The comparison site Moneyfacts.co.uk calculates that if all 15 major lenders – worth 85 per cent of the total mortgage market – failed to pass on another 0.5 per cent drop, those customers stuck on standard variable rates (SVR) could be forced to pay the difference, which could be as much as £2.5bn.

"Almost a month after the Monetary Policy Committee announced a shock 0.5 per cent cut to the base rate, in unison with key central banks around the globe, more than three-quarters of all UK lenders have yet to pass on this reduction to their ever growing number of standard variable rate mortgage customers," says Darren Cook of Moneyfacts.co.uk.

"With mortgage approvals falling to rock-bottom levels and house values continuing to fall to unseen troughs, it is unlikely that mortgage lenders will soon regain their appetite to lend at reasonable levels in the short term. Unfortunately, with this increasing turmoil, the majority of customers currently have no alternative but to switch to their lender's SVR."

Adds Melanie Bien, director of the independent mortgage broker Savills Private Finance: "As further aggressive reductions in base rate occur, we are likely to see even more lenders take longer to pass the reductions on, while others will pass on only part of the reduction.

"Lenders such as Halifax, which traditionally are good at passing on the full reduction, may start taking the opportunity to pass on only part of it – particularly if base rate falls to very low levels, such as 2 per cent.

"Last month, HBOS told customers that it was changing its promise that its SVR would not be any higher than 2 per cent above base rate. From this month, the lender is increasing this margin to 3 per cent. This does not bode well for the future.

"The only way for borrowers to get round this is to opt for a base-rate tracker that is linked to base rate and not the SVR. But be careful: a number of lenders have a collar on their trackers below which your mortgage rate can't fall – so check that you will not be penalised if interest rates drop dramatically."

Current accounts

Your current account isn't immune either. Since the Office of Fair Trading began proceedings against unfair bank charges, the way that banks manage and charge you for your current account has been under the spotlight.

Anticipating an unfavourable outcome to the court case – which still trundles on – banks have been increasingly keen to shift customers into fee-paying accounts. Meanwhile, they have also been increasing their fees and introducing new charges.

And that's worth big money. Lloyds TSB charged its current account customers £693m last year, and now that the economy has taken such a fundamental downturn, the banks are even more keen to maximise their earnings.

Kevin Mountford, head of current accounts for the comparison site Moneysupermarket.com, suggests that banks are turning the screws on overdrafts, and that some customers are finding that they have as little as one month to pay back their borrowing.

Moreover, customers who enjoy interest-free overdrafts may soon find themselves being charged interest. And unauthorised borrowing fees may become even more widespread if the order in which money flows into and out of your account suddenly means that you go into the red, thereby incurring a fee.

"Banks face increasing pressure to make money where they can," Mountford says. "They will be suffering due to the fact that on one hand they have to compete in a price-led market, and on the other they are incurring increasing regulatory costs.

"Some profit-related initiatives will be introduced using more stealth methods such as reducing in-credit interest on current accounts while increasing overdraft rates – a trend we are already starting to see [see table, above right]."

Mountford adds: "The question is: how far can banks go before they push customers to wake up to the extra costs and switch?"