Beware Of Rate Rip-offs In 2008

If your credit-card issuer hiked your interest rate by a whopping 10% APR, would you take the pain or could you switch?

When you've built up a sizeable debt on a credit card, what's the last thing that you want to happen? My guess is that the least welcome event would be a sharp increase in the interest rates which you're paying. Unfortunately, that's exactly what's happening to customers of card firm Marbles, which raises its rates on New Year's Day.

At present, 338,000 Marbles cardholders pay 19.9% APR for retail purchases and 23.9% APR for cash withdrawals. However, from 1 January, these interest rates go up by as much as 10% APR, leaving Marbles customers paying well over the odds. The new rates will be as high as 26.9% APR for purchases and a staggering 33.9% APR for cash withdrawals. Ouch!

According to my research, the average rate charged by a credit card for retail spending is around 16.5% APR. Thus, Marbles cardholders will be paying around 10% APR above this level -- and around six times the base rate when they withdraw cash. So, why such a crippling rate rise from Marbles, given that the Bank of England cut its base rate to 5.50% early in December?

The simple answer is that Marbles has been sold, and its new owners clearly intend to squeeze every last penny out of these victims -- I mean, borrowers. Giant global bank HSBC acquired Marbles five years ago, following its acquisition of US subprime lender Household International in 2002. However, in October, HSBC sold its HFC division -- which includes the Marbles and Beneficial Bank brands -- to specialist lender SAV Credit for £385 million.

SAV Credit, a private company, has 150,000 customers using its aqua MasterCard aimed at those with credit problems (35.9% typical APR). As Marbles no longer accepts new customers and is in `run off', the new owner and its venture-capital backers are keen to plunder maximum profits from existing cardholders. Thus, the easiest way to do this is whack up interest rates, regardless of the damage that this will inflict on hard-up borrowers!

This is a sad turn of events for Marbles, which had built up a good reputation as one of the first and best online credit cards. Indeed, I acquired a Marbles card following its launch in 1999 and used it for several years. Of course, this rate hike could backfire on the new owners of Marbles, as they run the risk of greater defaults and bad debts -- and a mass exodus of hacked-off customers.

Thus, my advice to Marbles cardholders -- and to anyone else who finds themselves in the same predicament -- is to vote with your feet and jump ship. In other words, immediately stop spending, cut up your card, and look into replacing your existing balance with a cheaper form of credit. If you credit history is up to scratch, then shift your debts to a 0% balance transfer or a low-rate lifetime balance transfer.

Finally, this is yet another example of the worldwide credit crisis hitting hard-pressed borrowers. Indeed, it's clear to me that the crunch won't spare mainstream, high-street borrowers. Therefore, as arrears and bad debts continue to mount, I expect a stream of rate rises from lenders keen to preserve their profits. Of course, as soon as we hear about rate changes, Fool.co.uk will let you know. In the meantime, here's a list of notable rate rises from the past three months:

Happy New Year to you and yours from all at Fool.co.uk!

More: Slash your interest bill with a 0% card | Clean Up Your Credit Cards! | First Class Credit Cards