Credit cards Updated:
The credit card market continues to be inundated with introductory interest-free deals that can help keep the cost of borrowing to an absolute minimum, but unfortunately, all may not be as positive as it first appears. In fact, behind the scenes we can see a far different story, with our latest research showing that the average purchase rate across the credit card market has hit an all-time high of 21.6% APR.
While this may not have much of an impact on those benefiting from interest-free deals, cardholders with a high interest credit card may not be fully aware of how much they pay over the long term – or how much they could save by switching to a better deal.
It's easy to become complacent when it comes to credit cards, but if you rack up a high balance and don't clear it straight away, it could cost a huge amount in the long run: our calculations show that sticking with a high interest card could mean that it will take almost four years to clear a debt of as little as £1,000.
Conversely, switching to a better deal could save a small fortune. The figures show that borrowers who are initially charged 21.6% APR on a £1,000 debt but then switch to a low rate credit card at 6.4% APR could save a massive £276 in interest charges, and that's just for starters.
Those with a store card that charges 29.9% APR (a typical rate for this kind of deal) who then switch to a cheaper deal could save a grand total of £510, and better still, if they applied for Halifax's 40-month 0% interest balance transfer card they would only have to pay a £28.50 fee, provided they clear the debt before the interest-free offer ends.
The table below highlights a few of these calculations, and as you can see, the savings can be marked:
Switching to a lower interest rate (or even an interest-free deal) really can be worthwhile, and it can be particularly suitable for those who aren't able to repay a credit card balance in full each month. Those who struggle with household debts are unlikely to be able to afford the luxury of paying more than the minimum repayment, but that means they could end up with the debt hanging over their heads for a significant period of time, and is why it's so important to find the best deal possible.
However, this can unfortunately be easier said than done, as Rachel Springall, finance expert at Moneyfacts, explains: "Not all customers will pre-plan their spending and they may not have an interest-free deal ready to use. In addition, not all borrowers will be offered the best rates, and some may not have the shiniest credit rating, which all leads to more expensive deals being turned to.
"For this reason, borrowers would be wise to get a credit check before applying for credit so that they can get an idea of what their borrowing footprint looks like, and therefore, what kind of deal they are likely to secure. Borrowers should also be prepared to do the maths to work out what the true cost of their borrowing will be, with things like fees and revert rates all having a potential impact."
While many borrowers work hard to secure the best deals when it comes to their credit cards, store cards can often be their downfall, with them often being the highest-charging cards that are in most people's pockets. "While these cards are certainly great for upfront discounts at the till, these benefits are likely to be wiped out by interest charges if borrowers keep a debt for too long," said Rachel.
"Getting on top of debts should therefore be the top priority of any spender. Taking advantage of more cost-effective cards and spreading a debt on an interest-free deal means consumers can then concentrate on clearing it for good without huge amounts of interest adding to the bill.
"Those who move their debts to a better deal will clear a balance much faster than if they stayed put, and they will then be able to put aside some savings for spending in the future, which means they won't have to rely on the plastic quite as much."
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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