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Credit card interest hits new record high

Credit card interest hits new record high

Category: Credit cards

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 It is now over 6 months old so the content may be out of date.

Given recent reports that everything is going down, from mortgage rates to savings interest, it is surprising to find that credit card interest has been bucking the trend and the effects of the Bank of England's base rate cut by going up. According to our latest research, the average credit card purchase rate has now in fact hit a record high of 22.8% APR.

As credit card users may know, a lot of the recent competition regarding credit cards has concentrated on interest-free deals, which allow borrowers to avoid high interest rates if they manage to pay off their balance on time. This year, however, there has been little change to the longest interest-free terms, with our research showing that the average 0% introductory purchase term has increased by only seven days year-on-year (from 273 days in September 2015 to 280 days now). The average 0% introductory balance transfer term has improved slightly more, from 551 days in September 2015 to 584 days now.

Interest-free terms may be improving, but the fact that standard interest rates are rising could still pose concern for many borrowers. Rachel Springall, finance expert at Moneyfacts, explains why the base rate cut has had such a limited effect: "Borrowers using the plastic are unlikely to be feeling the effects of a 0.25% cut, because the interest charged on the majority of credit cards is linked to the risk borrowers represent rather than wider market changes. Only a small portion of lenders link card interest to base rate, so most customers won't save any cash."

Nonetheless, there are still some impressive deals to be found, particularly if you're looking at the best deals on the market rather than the averages. For example, the best introductory purchase term is now offered by Sainsbury's Bank at 27 months (up from the top deal of 26 months offered a year ago), and the best introductory balance transfer term deal is currently offered by Halifax at 41 months, up one month from the best deal a year ago. The table below highlights the changes in more detail:

Average Rates Sep-15
Average credit card purchase rate (APR) 21.5% 22.8%
Average 0% introductory purchase term 273 days 280 days
Average 0% introductory balance transfer term 551 days 584 days
Best Deals Sep-15
Best 0% introductory purchase card Yorkshire Bank - 26 months Sainsbury's Bank - 27 months
Best 0% introductory balance transfer card Virgin Money - 40 months Halifax - 41 months
Compiled 06.09.2016
Best buy deals shown are for new customers

In contrast, the table reveals that the average purchase rate has gone up by 1.3% from 21.5% in September last year, showing that it is more important than ever to pay off debts within the introductory interest-free terms. The savings from this could be marked, as our calculations show that borrowing £4,000 based on 22.8% APR would cost £1,406 in interest, which would take three years and one month to pay off if a repayment of £150 is made each month. However, if a borrower opted for the best interest-free credit card and paid back the debt before the offer ended, then they could avoid accruing interest charges altogether.

Rachel concludes: "While there is indeed a saturation of interest-free offers available, it's all down to the borrower to make sure they can tackle their debts by switching deals and repaying their balance as much as possible before interest applies. As a helping hand it would be great to see more providers encouraging their customers to make bigger monthly repayments, particularly if borrowers are unaware of how long their debt could hang over their heads."

What next?

Have a look at our top credit cards to see if you could benefit from an interest-free deal to help you cover a big purchase or consolidate your debt. Just make sure you can repay any charge you make on a credit card within a reasonable time so as not to negatively affect your credit rating

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.