Credit-card costs continue to climb!

Since 2007, the Bank of England's base rate has plunged from nearly 6% to just 0.5%. So why is borrowing on credit cards getting more expensive?

The past twelve months haven't been great for the economy. As the UK slipped into recession in the second half of 2008, the Bank of England responded by slashing its base rate. At the start of October 2008, the base rate was 5% a year. Today, it stands at 0.5% -- the lowest it's been in the Bank's 315-year history.

Great news for mortgage borrowers

So, as the base rate has fallen, so too has the cost of borrowing, right? Well, yes and no. On one hand, mortgage borrowers on variable or tracker rates have seen hefty falls in their monthly repayments. Also, fixed rates for new borrowers have come down, making their repayments more affordable.

Alas, outside of the mortgage market, things aren't quite so rosy. Indeed, many British businesses are reporting sharply higher borrowing costs. Likewise, the market for personal loans has been largely unaffected by the collapsing base rate. Three years ago, it was possible to get an unsecured personal loan at under 6% APR. Today, Best Buy loan rates are more like 8% APR.

The crippling cost of credit cards

However, the biggest problem for borrowers is the rising cost of borrowing on a credit card. Indeed, the pattern is obvious: as the base rate has fallen, the cost of borrowing on cards has risen.

The average rate charged on credit-card purchases has risen from 16.3% APR in June 2007 to 18.1% APR today, according to lovemoney.com partner Moneyfacts. Over this two-year period, the base rate has dropped from 5.5% to 0.5%. Thus, while the base rate has gone down by five percentage points, the cost of spending on a credit card has gone up by almost two percentage points.

If a sharply reduced base rate means that lenders can borrow more cheaply, then why are Brits' everyday borrowing costs going up? To many people -- including me -- this seems grossly unfair. Then again, there has never been much of a link between credit-card rates and the base rate. Indeed, whatever happens to the base rate, the cost of borrowing on a credit card has always been sky high.

Nevertheless, it seems to me that card issuers are fleecing borrowers. In fact, I believe that the present margin of 17.6% over base rate is the highest enjoyed by card issuers since I started out in financial services in 1987. Indeed, it could well be the highest margin over base rate enjoyed since Barclaycard launched the UK's first credit card in 1966!

Why are card rates going up?

Lenders -- especially banks -- are using high interest-rate margins to rebuild their blown-up balance sheets. In other words, they're charging as much as they can in an effort to rebuild their profitability. As a nation, we owe around £53 billion on credit cards, of which around £40 billion is interest-bearing debt. Therefore, every 1% hike in interest rates costs cardholders roughly £400 million a year in extra interest.

In order to make more money, card issuers have been steadily raising rates for existing cardholders. In the past six months, twelve cards have increased rates, including those from American Express, Bank of Scotland, Capital One, Halifax and Nationwide BS. Those hit hardest will be cardholders who can afford to pay only their minimum monthly repayments and, therefore, pay the most interest over time.

Also, card firms have been increasing the charges and interest rates for cash withdrawals, foreign-currency fees, introducing annual fees, and so on. Likewise, cards charging below-average rates of interest have been withdrawn, to be replaced by new plastic charging higher APRs.

Of course, lenders will argue that rising unemployment, bankruptcies, insolvencies, bad debts and arrears are eating into their profits, forcing them to widen their margins by raising rates.

The most important thing to bear in mind is that you can fight back by switching to one of dozens of credit cards that charge no interest on transferred debts. These 0% balance transfers can freeze your interest bill for up to sixteen months, giving you a well-earned breather and extra time to chip away at your balance.

And finally...

In my view, it's high time that the government did something to address this rip-off. After all, taxpayers' money was used to bail out several lenders, including HBOS, Lloyds TSB and Royal Bank of Scotland. Frankly, it's criminal that our money is being lent back to us at rates of interest normally associated with doorstep lenders and loan sharks.

In summary: pay attention, prime minister Gordon Brown, chancellor Alistair Darling and business secretary Lord Mandelson, because Britain is sick of being swindled by banks!

More: Find a cracking credit card today | Save thousands with a 0% credit card | Don't be scammed!