In early 2010 credit card interest rates in the UK increased to the highest figure they’d been in twelve years.
The ‘credit crunch’ seemed to have eliminated any competitive offers in the borrowing market as providers were required to raise their credit cards’ percentage of interest.
It was suspected that this new approach has been adopted as providers become ever more worried about the current lull in employment levels. Higher interest rates will result in existing customers to more quickly pay off their debts and will also somewhat save the providers financially.
In the 1990s, credit cards were relatively new and interest rates as a result were relatively high. In 1998 the average rate was 21.1% and the bank rate was 7.25%. Since then, however, interest levels have declined and borrowing has reached a new popularity. Providers had to offer lower rates to compete with other businesses. In 2006, the average rate was at the lowest recorded percentage: just 14.8%.
The recession has meant a steady climb in rates since 2006, however, even though the bank rate has continued to decrease. The base rate is now at an all-time low: just 0.5% since last March. The average interest rate is now 18.8%, which approaches the recorded amount for 1998. Some other rates have also been increasing, with balance transfer, cash withdrawal and foreign currency transfer often being grouped. This means a larger overall fee across the field of credit card payment.
The Bank of England stated recently that the amount of ‘bad debt’ being written off credit cards has vastly increased. Banks accept that a customer’s debt will never be repaid and will subsequently write it off.
With unemployment rates reaching a new high, banks have to accept the ‘striking off’ of outstanding debt as a regular occurrence.
£1.6bn of debt was written-off in the third quarter of 2009 which is double the humble £8bn of 2008. It is mainly this high level of bankruptcy that has coerced providers to increase their rates once again.
The confirmation of this 18.8% rise is obvious across the financial world. The Barclaycard Simplicity credit card as well as MBNA’s platinum and platinum rewards credit cards upped their interest by 1%, making a total of 16.9% and 7.8% respectively. The trend has also held true for instant decision credit card interest rates.
There are a few cards that have decreased their interest, however, Saga’s platinum card for example which decreased its interest by 4%.
The change will have a widespread influence, as even existing borrowers who never miss their payments will suffer from the increase. Transferring debt is also becoming very difficult with balance transfer and low introductory rate offers increasingly hard to find.
Even the existing lower interest offers will be very wary about the applications they accept. Even though the increased rates will not affect those who pay off their charges in full every month, more disorganised borrowers could receive a rather startling wake-up call.