Credit card interest rates at a 12 year high

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By Paul Davies
Know Your Money Editor

Credit card rates at their highest level for 12 years it has been revealed, despite record lows for interest rates.

This could be unwelcome news for those reliant upon their credit card and could be worse still for those already in debt. However, it could provide you with the perfect opportunity to shop around for a better deal as a lower rate on your credit card could mean more money in your pocket.

What were the findings?

Research carried out by Moneyfacts found that the UK is currently seeing a 12 year high for credit card rates.

It revealed that the average credit card rate is currently 18.8 per cent, despite the fact rates had dropped to their lowest level in 2006 - 14.8 per cent.

Competition between credit card providers increased at the end of the 1990s and caused rates to begin to fall, however the recent economic crisis may mean that the banks now need to recover some of their losses.

In real terms this means that credit card borrowers with a debt of £5,000 on their card, who opt to make only the minimum repayment each month - which is within their rights - will now be faced with repaying an extra £2,289 across the life of the debt than they would have in February 2006.

Phil Perry, director of Ark Financial Planning, said: "Banks' credit card facilities are one of those areas that they haven't necessarily had to tighten up on. It's not about lending, it's about people that are already in debt paying that little bit more for it."

"People keep saying they are trying to kick-start the economy, but they're not really. The banks' are really trying to get their profits back into play."

This may be bad news for people who are currently struggling to repay the debts that they owe, as if the only option that they have had has been credit cards they are now looking at having to pay "a hell of a lot more" in interest than previously had been the case.

Shopping around may be a wise option?

However, the damage caused by the changes could be minimised by savvy consumers who decide to work for a better deal.

But the report also suggests that a number of customers who would previously have switched to another provider with relative ease are now finding it is not so easy to do so.

It states that competitive deals for balance transfers and introductory purchases are still on offer, but card providers are now being extremely selective over exactly which people they choose to accept for these deals.

Is a good deal still available?

"If customers receive notice of a rate increase, they should challenge their provider for the reason why the increase is necessary, especially if their credit status hasn't changed," said Michelle Slade, spokesperson for Moneyfacts.co.uk.

Consumers could be interested in the Virgin Money Mastercard, which offers 16 months interest-free with a 2.98 per cent fee.

And the deal could still prove worthwhile even if you are unable to pay off the whole balance before the 0 per cent period comes to an end as it offers a little time to repay some of the debt.

Peter Harrison, credit cards expert at moneysupermarket.com, said: "Holding more than one credit card can be a good idea; if you are using one for balance transfers and one for purchases and have suitable 0 per cent deals on both."

Despite this, borrowers could be hit by heavy interest repayments in the year ahead - at a time when many people are already feeling the ongoing effects of the recession.

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