Halifax's secret interest rate hike

Halifax/Bank of Scotland is cutting interest rates for many of its credit card customers. But don't get too excited by these price drops, because they probably won't last...

The relationship between the Bank of England base rate and credit card interest rates is certainly a confusing one. Why for example are credit card interest rates at a 13 year high when the Bank of England base rate is at a 300 year low?

Well it’s this lack of clarity that Halifax/Bank of Scotland (HBOS) is attempting to combat by revamping their credit cards so that the interest rates charged are explicitly linked to the Bank of England base rate.

This will initially see interest rates drop for most customers, due to the unusually low base rate. But if the Bank of England hikes its rates – as many are expecting it to – customers could see their interest charges soar.

Personalised rate

The changes will introduce a single interest rate that is charged across all balances held on a Halifax or Bank of Scotland credit card. This will make balance transfer, purchase and cash withdrawal interest rates uniform.

This new rate will be based on the average rate applied to purchases, cash withdrawals and balance transfers in January to March this year. So if you only had purchase balances present on your card throughout this period, your new cross-card rate would be the same as your current purchase rate. But if you made cash withdrawals, which are more expensive, your new rate will be higher.

If you did not use your card in the first three months of this year then HBOS will use your current purchase rate as your new rate.

Similarly, if you cleared off your balance when your credit card bill arrived every month (even if you had made cash withdrawals) your new rate will be identical to your current purchase rate.

It’s also important to note that you won’t get a precisely averaged rate; you’ll be allocated one that is closest to your average from HBOS’s available selection.

If you are currently on a promotional 0% rate then this will be honoured until it expires as well. But for the purposes of calculating your new rate, the standard non-promo rate will be used.

The Bank of England base rate will then be built into this new rate. So if you are given a new rate of 17% APR, this would be made up of a 16.5% personalised rate plus the base rate at 0.5%.

Most existing Halifax and Bank of Scotland card holders will move onto their new rate in August. But anyone who opened their account after 1st December 2010 or who holds a Halifax Clarity card will remain on their current rate until 2012.

Looming base rate rise

HBOS claims that a majority of customers will either pay less interest, exactly the same amount of interest or less than 2p more for every £1,000 they borrow.

However these stats rely on the assumption that the base rate will stay at its current 300 year low of 0.5%. If the base rate rises, as it surely will do soon, then the amount you pay in interest will also be hiked.

For example, if your new credit card rate is initially set at 17% APR and the base rate rises to 5%, your interest rate will also climb to 21.5%. So if you have a constant balance of £1,000 sat on your card, you’ll see your annual interest charge hiked by £45 from £170 to £215.

However, HBOS is guaranteeing that initial rates will stay fixed until November – this will shield customers from any sudden base rate rises.

If you will be affected by the revamp in August you should receive a letter in the next month confirming your new interest rate. HBOS is giving customers until July to reject any change to their account. But if you do choose to do this, you won’t be able to continue using the card for spending and will have to clear the rest of the balance off at your current rate.

It may also be wise to consider this option if the base rate jumps before July in order to avoid any rise in your interest rate come November.

You can compare all the current market leading credit cards at lovemoney.com.

Convenient timing

In principle, attaching credit card interest rates to the base rate has to be a positive step for the banking sector and I applaud HBOS for moving first. Yet the timing of this shift should arouse some suspicion.

The base rate has been sitting at the unusually low rate of 0.5% for over two years now. It has to rise soon, and when it does HBOS will cash in on rising credit card interest rates across the board. Would they have made such a change when the base rate was high and expected to drop? Somehow, I think not.

Furthermore, if the base rate rises before this new system is implemented in August, cardholders could feel a little short-changed by this use of the lower base rate percentage.

For example, say you receive a letter tomorrow confirming that your new interest rate will be 17% (16.5% + 0.5% base rate). Even if the base rate rises to 5% next month, you will keep your 17% rate until November (as the initial rate is guaranteed until then), at which point it will rise by 4.5 percentage points as the 5% base rate inflates your interest rate.

If HBOS had taken their reading just one month later or at the time of the change in August, no such rise would take place in November (unless the base rate was upped again between August and November that is).

But a fluctuation in the base rate isn’t the only event that could push up your interest rate.

Variable rates

Your personal interest rate is still variable, meaning HBOS could hike it without any change in the Bank of England base rate. But if this does happen, HBOS has made a commitment to fully set out clear reasons why it has upped the rate. Such reasons could include:

• Missing payments or exceeding your credit limit multiple times.
• An increase in cash withdrawals.
• Not keeping to the conditions of another Lloyds Banking Group product.
• A change in your credit record.
• If HBOS “experiences or anticipates changes to the cost of running our business”.

However if your rate does alter as a result of any of these reasons you can reject the change and clear the balance at your existing rate. Read The secret trick you can use against your credit card provider to find out how.

More: Compare credit cards with lovemoney.com | Eight tips to clear your credit card debts | The 20 month 0% credit card!