Is Your Credit Card Charging More?

Although the Bank of England is reducing its base rate, credit cards are getting more expensive. We explain how to curb these costs.

As you probably know, the Bank of England has cut its base rate three times since December. It now stands at 5% a year, down three-quarters of a percentage point in five months.

As you'd expect, this is having some impact on mortgage rates, particularly for tracker loans and those linked to lenders' standard variable rates. However, a worldwide credit crunch is restricting banks' ability to lend, which means that some lenders have actually increased their mortgage rates in 2008.

Alas, base-rate cuts usually have very little impact on another important area of borrowing: unsecured lending, alias consumer credit. As I warned earlier this week in Personal Loans Are Getting Pricier, unsecured personal loans have become more expensive. Following temporary rate cuts for a `January sale', personal loans have become dearer in the past three months.

Credit cards are getting more expensive

What's more, the rates charged by credit cards aren't affected by base-rate cuts. Indeed, there's a huge disconnect between credit-card interest rates and the base rate. Put simply, whatever happens to the base rate, credit-card issuers like to keep their interest rates high!

In fact, according to Fool partner Moneyfacts, card interest rates have increased noticeably since April 2006. Two years ago, the Office of Fair Trading (OFT) forced card issuers to cut their late-payment fines to a maximum of £12 per offence. Some card firms were charging fines of £20 to £25, so they lost a vital source of revenue.

Predictably, credit-card issuers fought back by raising their charges elsewhere. In the past two years, the average interest rate for purchases was 14.9% APR. Today, this stands at 16.4%, which is 1.5 percentage points higher, or an increase of a tenth (10%). Thus, a level balance of, say, £3,000 would have cost £447 in interest two years ago. Today, the yearly interest bill will be £492, or £45 a year more.

Of course, if you always pay your monthly credit-card bills in full, then rate rises won't affect you one bit. (Try a cashback card to earn as you spend!) However, if you rely on your credit card to subsidise your lifestyle, then things are looking increasingly grim. Worst hit are cardholders who withdraw cash on their credit cards. Using credit cards to get cash is always a bad move, because you pay:

• 1.    a withdrawal fee for every cash advance (via cash machines or over the counter);
• 2.    interest from day one (there is no interest-free period for cash); and
• 3.    interest at sky-high rates.

Unfortunately, the average interest rate for cash transactions has soared from 18.1% APR to 24.3% APR. Today, cash withdrawals are more than a third (34%) more expensive than they were in April 2006. Even worse, the typical cash-advance fee has risen from 2% (minimum £2) to 3% (minimum £3), piling even more pressure on struggling cardholders.

Now for some good news

If you're fed up with paying ever-higher interest and charges on your credit-card debt, then I have some good news for you. Moneyfacts reports that the number of cards offering 0% balance transfers has actually climbed in the past 24 months.

In April 2006, 82 cards allowed borrowers to transfer existing credit-card debts and enjoy an interest-free break lasting up to a year. Now, there are 99 balance-transfer cards available, with the longest 0% deal lasting a full fifteen months (from Virgin Money). So, if your card balance is bothering you, then simply transfer it to a new 0% card and take a breather for a while!

In addition, the number of cards offering 0% on purchases has risen since April 2006. Back then, there were 58 of these 0% deals, with the longest lasting ten months. Today, there are 85 cards, with deals lasting up to a year (HSBC tops the table).

So, while existing cardholders are being hit by rate rises, things still look good for new customers. If you have a solid credit history and a good payment record, then you should have no problem opening a 0% card in order to slash your interest bill to zero. At least £1 billion of credit-card debt is currently interest-free, thanks to 0% deals. So, instead of being taken advantage of as an existing customer, why not enjoy the 0% game as a new cardholder?

More: Find cracking credit cards via the Fool | How £5 Can Lose £50 | Hands Off Our 0% Cards!