Lenders have cut back on the availability of credit and pushed up non-mortgage interest rates. They're also cutting back on interest-free periods.
Following years of reckless lending during the twin booms in property and credit, colossal losses and rising bad debts are forcing banks to cut back on their lending. Indeed, despite banks being bailed out with hundreds of billions of pounds of taxpayers' money, there has been a sharp slowdown in lending to individuals and businesses.
What's more, lenders are using cuts in the Bank of England base rate to rebuild what were once wafer-thin lending margins. So, although the base rate has dived from 5% in early October to just 1.5% today, mortgage rates have been slow to follow suit. Indeed, some lenders will refuse to pass on further base-rate cuts to their borrowers. Instead, they aim to rebuild their net interest margin -- the return they make from lending money which they've borrowed from savers or other banks.
So, lending levels have been pruned and, at the same time, the cost of credit is rising relative to the base rate. In addition, lenders have increased the cost of non-mortgage credit, with the interest rates charged by credit cards and personal loans slightly higher than they were before the recent round of base-rate cuts. Indeed, I warned that credit-card rates were on the rise in The Curse Of The Credit-Card Crunch
Time isn't on my side
However, lenders have yet another trick up their sleeve. One way to reduce the availability of credit is to reduce the interest-free period offered by credit cards. This is because credit is fundamentally a function of time available, as well as being affected by interest rates, repayment frequency, and so on.
Note that only full payers -- those who repay every monthly balance in full and on time -- can benefit from this interest-free period on purchases. Also, it's important to grasp that there is not normally an interest-free period on cash withdrawals, credit-card cheques and balance transfers (other than 0% balance transfers).
Let me give you an example of what can happen. Last week, I received a letter from Capital One informing me that, from next month, it will cut the interest-free period on my cashback credit card from 59 days to 45 days. In other words, by chopping my interest-free period by 14 days, I lose a fortnight of extra credit.
This is good news for Capital One, because it receives my repayments earlier. Alas, it's bad news for me, because my repayment date edges forward two weeks. Even worse, my repayment date now falls before my usual payday, which is a wholly inconvenient time for me. Then again, as this is not my main credit card, it won't affect my monthly budgeting to any huge degree.
This isn't the first time that `credit curbing' has happened to me. Indeed, it's become a frequent occurrence over the past two or three years. Every so often, I get a letter informing me that my interest-free period is being trimmed. In some cases, the interest-free period has been cut twice, as card issuers desperately seek ways to improve their cash flow and profitability.
For the record, here are the normal interest-free periods on purchases offered by a random sample of credit cards taken from various Best Buy tables:
| Card | Interest-free period (days) | Interest rate on purchases (% APR) |
|---|---|---|
Lloyds TSB Advance MasterCard | 0 | 11.9 |
| Egg Visa | 45 | 16.9 |
| Virgin Money Credit Card MasterCard | 50 | 16.6 |
Marks & Spencer Money MasterCard | 55 | 15.9 |
| American Express Platinum Cash Back Card | 56 | 18.9 |
| Barclaycard Simplicity Visa | 56 | 6.8 |
| NatWest Classic Credit Card MasterCard | 56 | 16.9 |
| Nationwide BS Classic Visa | 56 | 17.9 |
| HSBC Bank Credit Card MasterCard | 56 | 16.9 |
| Barclaycard OnePulse with Balance Transfer Visa | 56 | 14.9 |
| Tesco Personal Finance Bonus MasterCard/Visa | 56 | 15.9 |
| Halifax All in One MasterCard | 59 | 15.9 |
AA Online Credit Card MasterCard | 59 | 15.9 |
As you can see, the Lloyds TSB Advance MasterCard has no interest-free period, even if you repay every monthly bill in full. This is because it is aimed at `revolvers' -- borrowers who roll over a balance from one month to the next. As for the remaining fourteen cards in my table, Egg Visa has the lowest interest-free period, at just 45 days. So, Egg cardholders must make their monthly repayment within 14 days of their statement date, which doesn't leave much room for manoeuvre if you're on holiday during this period.
The Virgin Money card has only 50 days of interest-free credit on purchases. On the other hand, this card is the number-one Best Buy for 0% balance transfers. The remaining cards all have interest-free periods between 55 and 59 days, but these could be clipped at any time. Indeed, given the ongoing strains of the credit crunch, I expect interest-free periods to become less generous. Hence, watch out for statement inserts, letters or other warnings that your interest-free period is being shortened...
Finally, if you're still paying interest on your credit-card debt, then try shifting your balances to a 0% balance transfer card. You can learn the rules of this game in Five Tips For A Successful Balance Transfer.
More: Find your ideal credit card | Destroy Your Debts In Five Steps | Ditch That Rubbish Account