The Curse Of The Credit-Card Crunch!

Despite the Bank of England slashing its base rate, interest rates and fees charged by credit cards continue to creep up...

Last week brought some good news for homeowners and borrowers, as the Bank of England slashed its base rate from 4.5% to 3%. This last time the base rate stood at 3% was in January 1955, so it's at a 53-year low. This reflects the Bank's worries regarding the length and depth of the recession currently hitting the UK.

Of course, not everyone will benefit from this rate change, particularly homeowners with fixed-rate mortgages, whose payments are based on a set rate which doesn't respond to rate changes. However, borrowers with discount and tracker mortgages should see their monthly repayments come down in the weeks ahead.

Credit cards get costlier

Despite the base rate diving by a third overnight, one group of borrowers has seen recent rises in interest rates and fees -- and can expect more to come in months ahead. I refer, of course, to users of credit cards, who are under the cosh, thanks to falling profits and rising bad debts for card issuers.

Indeed, the interest rates charged by credit cards are very stubborn. They barely change over the long term, even when the base rate and interest rates in general move dramatically. Sadly, a Christmas on credit is looking increasingly more expensive, thanks to significant increases in the cost of borrowing on plastic.

In fact, Fool Partner Moneyfacts has spotted the following rate and fee increases since 1 August:

 Sixteen cards have upped interest rates for purchases

 Twelve cards have hiked cash interest rates

 Eleven cards have increased balance-transfer fees

 Seven cards have raised cash-advance fees

 Seven card issuers have cut their interest-free period

 Four cards have put up foreign-usage fees

Of the sixteen cards which have increased interest rates on purchases, these four upped their annual percentage rate (APR) by more than 1% a year:

Source: Moneyfacts, 12/11/08

The fattest rate rises are for cash withdrawals on credit cards (always a terrible idea; use your debit card instead!), as the following table shows:

Source: Moneyfacts, 12/11/08

So, spending on credit cards -- and using them to get emergency cash -- is becoming more and more expensive. I expect this trend to continue. Also, I'm sad to see that the Egg Money MasterCard, a former Best Buy for years, is now not much better than average.

Balance transfers start to shrink

Yet more bad news: several card firms have reduced the length of their 0% balance transfers, which cuts the length of time that cunning card sharps can avoid paying interest on transferred debts. In the past three months, Abbey, Halifax, Sainsbury's Finance and Sky have trimmed their 0% deals. Even worse, Capital One, MINT, NatWest and Royal Bank of Scotland have pulled their 0% balance-transfer offers.

Nevertheless, cardholders with a decent credit history can still avoid interest for more than a year by shifting existing card balances to one of these beauties:

Best Buys for 0% balance transfers

Source: Moneyfacts, 12/11/08

My last piece of advice would be not to go mad by splurging on your credit card in the festive season. With the average purchase rate across all cards rising from 16.8% to 17.2% APR, borrowing on credit cards remains an expensive option. You should avoid spending more than you can afford to repay and, ideally, pay off your bill in full each month or switch to a 0% deal without delay!

More: Find a cracking credit card today | Breathe Easy With This Balance Transfer | Beware Of These Christmas Credit Traps