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Will a base rate rise affect your credit payments?

Will a base rate rise affect your credit payments?

Category: Credit cards

Updated: 17/11/2015
First Published: 17/11/2015

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Any discussions over base rate tend to focus on what would happen to savings and mortgage rates in the event of an increase. But what about your credit card repayments? Well, it looks as though you could be caught out there, too, with some providers already warning that their charges will rise in line with an increase in base rate.

What could happen?

In the last week, Barclaycard has written to its customers to announce that, from February next year, the interest rates it charges for standard purchases and cash withdrawals "will start to move in line with any changes to the Bank of England Base Rate". This means that if base rate moves down, so will your interest rates, but if it moves up, so will your rates – and that means you could end up paying more.

Using an example from Barclaycard, let's say that base rate were to go up by 0.25%. Based on a credit card charging a standard purchase rate of 18.90%, that 0.25% increase would mean you'd pay 21p a month more in interest for every £1,000 of your balance. Of course, there's the chance that the opposite could happen and base rate will actually go down, but this isn't something that's widely expected to happen, which means many cardholders could be facing higher repayments in the future.

Will it happen to me?

If you're a Barclaycard customer, then chances are, the changes will affect you. The new rules will come into force from 1 February next year, and you won't have to wait long to feel the impact of any rate changes – Barclaycard says that, if base rate does move after 1 February, customers' interest rates will be changed the day after their next monthly statement.

The new terms and conditions won't affect any promotional interest rates (such as 0% balance transfer terms) nor the balances associated with them, which aren't governed by base rate changes, but it'll come as little consolation to those who regularly use their credit card.

It isn't only Barclaycard customers who could feel the pinch, either. Almost two years ago Halifax announced that it, too, would increase the interest rates it charges in line with base rate movements, and while it hasn't yet had to follow through on that threat, it may not be long before it happens.

Indeed, many customers could have forgotten that their rate is linked to base rate movements, but they'll soon be reminded – and even if you're not with one of the providers mentioned, it's worth checking your terms and conditions to see if you, too, could face the same fate.

Take precautions

An extra 21p per £1,000 doesn't sound like a lot, but if you've got a large credit card balance, it could quickly add up. It could be even more detrimental to those who can't afford to make more than the minimum repayment each month as they'll be faced with more interest being added to the bill, so if you're likely to see your interest payments rise when base rate does, it's time to get prepared.

The first thing you'll want to do is to pay off as much of your balance as you can. This is of course a good tip for anyone who's racking up credit card debt, but even more so for those who could be facing rate hikes in the future, as the lower your balance is, the less severe the interest hit will be.

If you've got a good enough credit score (you can find out by getting a credit check with Experian CreditExpert), you may even want to think about finding a credit card that doesn't have any sneaky interest rate rises on the horizon. However, there's no guarantee that they won't increase their rates in the future – standard purchase rates are variable, and more providers could decide to link their charges to Bank of England decisions in the future – so you may want to opt for one that has a promotional rate instead.

Switching to a credit card that has a lengthy 0% balance transfer term or 0% purchase deal could be just the thing, giving you the chance to clear your debt or spread the cost of your purchases without worrying about interest adding to the bill, no matter what happens to base rate during the term of your agreement.

A bit of preparation could be all it takes to give you more repayment certainty, and that way, you needn't fear being hit with excess charges when base rate eventually rises.

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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