Growing APRs can catch you out at the end of the month or once a special offer has ended on your credit card.
The average interest rate charge on credit cards has grown to 19.1% according to research from financial information website Moneyfacts.
Rates have crept up from an average of 18.1% a year ago, meaning some borrowers might face a shock once any introductory offers on balance transfers and/or purchases end on their credit cards or if they fail to pay off their balance each month.
The last time credit cards came with such high APRs was in May 2011 - 18 months ago.
This rise means a borrower with £5,000 worth of debt, who only pays the minimum off each month, will now pay £692 more over the lifetime of the debt compared to a year ago.
The research looked at 231 credit cards that are available in the market today, including credit repair credit cards and low rate credit cards and the average was determined based on interest rates for purchases.
Sneaky tactics
Moneyfacts thinks that the rise is down to lenders having to subsidise some of their great deals on balance transfers, purchases, rewards and cashback. By hiking APRs, lenders make money out of those that fail to pay off balances in the introductory period or every month.
Another way card companies are making money is by allowing us to commit to lower repayments each month – sometimes as low as 1% of the balance - meaning the debt sticks around for longer and costs a borrower more.
Credit cards to watch out for
The 19.1% average points to a growth across the market, but looking at some individual products is far more alarming.
The Barclaycard Platinum Low Balance Transfer Fee visa for example comes with 12 months interest-free on balance transfers, with a tiny 0.9% handling fee, but carries a hefty 19.9% APR. Not a great cushion if you fail to clear the debt you bring over in that time.
Other culprits include cashback credit cards. The Santander 123 Credit Card for example could catch you out with an APR of 22.8%. This card offers tiered cashback; 1% on supermarket spends, 2% when you buy at department stores and 3% for travel costs like petrol. But if you don’t repay your balance at the end of the month the cashback you make will be worthless.
If you’re looking for a reward credit card, catching sight of the 50.1% APR on the British Airways American Express Premium Plus could put you off. But if you are a good borrower and pay back debt regularly then the trade-off is you will be able to benefit from earning Avios points to use on flights.
Lastly, if you have a poor credit history, credit builder credit cards have steep APRs as a penalty to discourage you from losing focus on becoming a good borrower. The Black Diamond Credit Card for example has a 59.9% APR – not something you want to be charged when you are trying to get your finances back on track!
Not all bad
But there are some great products that come with lower APRs without sacrificing on other features.
The MBNA Everyday Credit Card Visa for example offers the best of both worlds with 17 months interest-free on balance transfers (for a small 2% handling fee) as well as seven months interest-free on new purchases. If you fail to pay off what you owe within the introductory periods the interest rate won’t break the bank at 11.9%.
And if you’re after rewards the Lloyds TSB DUO Avios Amex/MasterCard has a much smaller 15.9% APR that can earn you Avios points for free flights. This reasonable APR is also available on the M&S Credit Card which comes with 15 months interest free on purchases giving you some breathing space before it kicks in anyway!
Also not all cashback cards are offset with steep APRs. The American Express Platinum Cashback Card comes with a reasonable 18.5% APR and offers 5% cashback in the first three months and 1.25% thereafter.
Elsewhere low rate credit cards are available. The Sainsbury’s Low Rate Credit Card is the market leader at the moment with an APR of 6.9%. So if you think you might have trouble month-to-month with paying balances off, this might be more suitable.
Look for special offers
Going for an introductory interest-free purchase card will give you some breathing space to focus on repaying solely the amount you have spent. Tesco has a leading 16-month offer with its Tesco Clubcard Credit Card.
Alternatively you can move existing debt onto balance trance transfer credit cards which can freeze the debt for a number of months. The market leader in this field at the moment is the Barclaycard 23 Month Platinum Visa which offers to keep balances interest-free for 23 months and comes with a relatively small handling fee of 2.8%. That’s nearly two years to get your finances in order.
Whatever credit card you’re after, make sure you shop around to make sure you are getting the best deal on every area.
Introductory offers are great for giving you some breathing space, but they won’t last forever! Also remember that you might not receive the advertised APR if your credit rating isn't up to scratch. Indeed only 51% of successful applicants get the headline rate, while the rest suffer steeper charges.
More on borrowing:
Derbyshire BS cuts personal loan rate again!
The best low-fee balance transfer credit cards