There has been a worrying rise in the number of consumers reliant on credit cards to keep their heads above water, with research from PwC showing that they stand a higher chance of being unable to repay their debt every month - and now that credit card interest rates have risen to a new high, these borrowers could be struggling even more.
Those who are only able to repay a very small portion of their card debts will find they have many years of debt ahead of them, and to make matters worse, the cost of credit is rising. Indeed, our latest data shows that the average credit card interest rate has hit 23.0% APR, the highest on moneyfacts.co.uk's records.
This is why it's so important to compare credit cards and make sure you're getting the best deal - and lowest rate - for your needs. Luckily, there are still some providers who charge significantly lower interest rates or even offer introductory interest-free terms, which could save huge amounts of interest and could mean you're able to pay the balance off sooner.
Our calculations show that if borrowers were to switch from a credit card charging 23.0% APR on a £1,000 debt to one charging 5.7% APR, they could save a colossal £420 in interest charges and shave a year off their repayment period, and they'd still only need to pay off £30 a month.
|Interest charged - 23.0% APR
|Interest charged - 5.7% APR
|£509 - 4 years and 3 months to repay||£89 - 3 years and 1 month to repay|
|Fixed monthly payment of £30. Source: moneyfacts.co.uk|
"Countless borrowers could well be relying on credit cards to make ends meet as the cost of living continues to rise," said Rachel Springall, finance expert at moneyfacts.co.uk. "While there has been a huge injection of introductory interest-free offers into the market over the last few years, which can help spread the cost of purchases, this has not stopped a surge in credit card interest away from these timed offers.
"What's more, further rises may occur in response to any base rate hike, as it gives lenders an excuse to pass on higher interest charges to consumers."
This means that consumers who have been contemplating taking out a credit card may want to take the plunge sooner rather than later, before interest rates have a chance to rise even more. This should only ever be considered by those who can afford to make the repayments and have a decent credit rating, but if you've got a plan, it could be worth taking a look at the best credit cards while they're still around to find one that doesn't charge extortionate rates.
The same applies to those who are already struggling with debt and want to take advantage of 0% balance transfer credit cards, as Rachel explains:
"There is no telling what the state of the credit card market may be in a few years' time, given increased scrutiny over the number and length of interest-free offers and what seems like an endless volume of easy credit. This means that those with debts should never assume that they can always hop from one lengthy interest-free deal to another with ease and make the most of these offers while they still can."
Lending criteria are set to tighten, too, which could make it more difficult to secure credit in the future - something that could be particularly damaging to those who are using credit to make ends meet.
"A tightening of lending on credit cards could be the equivalent of knocking down a pillar of stability from under those people barely managing due to the rising cost of living and little to no increase to their salary," said Rachel. "Credit cards have become a staple choice for borrowers, so a sudden change in their accessibility may turn borrowers to more expensive short-term lending, such as overdrafts and payday loans.
"Consumers with debt troubles are clearly vulnerable and they would be wise to seek out financial advice before they damage their credit score beyond repair. Lenders should also be on hand to work with consumers to make sure they are not borrowing more than they can afford to repay. It's always worthwhile for borrowers to check their credit report, get a credit repair card to build a good financial footprint or consolidate their debts using an unsecured personal loan if they run into difficulties."
Credit card interest rates are rising, so find the best deals while you still can. Consider a 0% purchase card if you're planning a big purchase, or if you're already building up credit card debt, find the best 0% balance transfer card to switch to. Just make sure your credit score is up to scratch (find out how to improve it if it isn't), but if you're really struggling with debt, start tackling it.
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