Credit cards Updated:
April 2006 the Office of Fair Trading (OFT) declared that default charges on credit cards were too high and suggested capping these at £12. In the months that followed credit card lenders cut these charges to £12 but in an attempt to recoup lost revenue, they hiked rates and charges elsewhere. Two years on, how much have the rates and charges on credit cards increased?
In April 2006 the average purchase rate on a credit card was 14.9%; today this has jumped to 16.4%. Previously whereas only a select number of customers were being penalised, now all credit card borrowers are paying the price.
For any credit card customer who paying their credit card bill in full each month, the rate increase will have no impact, but with many households struggling with increasing financial pressures, those who only repay the minimum will be hardest hit. Anyone with a credit card balance of £5,000 repaying just 2.5% per month will end up paying an additional £755 in interest from the 1.5% increase in purchase rates.
The average credit card interest rate for cash transactions have seen a marked increase from 18.1% to 24.3%. On top of this the majority of credit card institutions have increased their cash advance charges. Previously the majority of credit card institutions charged 2%, min £2: now the majority charge 3%, min £3. Taking cash out on credit cards has always been an expensive way of borrowing, particularly as interest is charged from day one, but with the 6.2% increase in the average rate credit card customers who are relying on cash advances to balance their monthly budget it will make a bad situation even worse.
There is some good news in that the number and length of introductory credit card deals has increased. In April 2006 there were 58 credit cards offering 0% introductory purchase deals of up to 10 months. Today there are 85 credit cards with deals of up to 12 months. There is also an increase in the number of credit cards offering 0% balance transfer deals, from 82 in April 2006 to 99 today. Previously the credit cards offered between up to 12 months now they offer up to 15 months.
The market for credit card balance transfers in the last two years has been very competitive with many credit card institutions increasing the length of their deal. However, many credit card institutions are tightening lending criteria so only those with perfect credit histories will be able to take advantage of these longer credit card deals, and even then the interest free limits will be much smaller than they would have been granted previously.
Although rates and charges on credit cards have increased, there are still good deals to be found for those with a good credit history. Shop around and find a credit card that best suits your needs, whether it's a balance transfer deal if you have an existing debt on a credit card, or a credit card with an incentive such as cashback if you pay your balance off in full.
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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