Credit Card Rate Gap Uncovered

1st October 2010  

The Bank of England (BoE) has kept interest rates on hold for the 18th month in a row, but the interest rates charged by credit card companies continue to rise.

In fact the BoE base rate, the key interest rate that most affects savers and borrowers, has gone down in the last 2 years but credit card interest rates continue to climb.

In September 2008 the Base Rate was 5.0%, it now remains steady at 0.5%. In that time the average interest rate on a new credit card has gone from 16.5% to 18.1%, a rise of more than 1.5%.

And its not just new customers that are affected, on average there are more customers finding their credit card interest rates rising than there are falling. The average rate charged by the most popular cards is now 17.32 percent, up from 16.47 percent in January 2009.

The good news is that this month there’s a proliferation of new 0% Balance Transfer credit card deals on the market and consumers should look to maximise the opportunity that these deals offer to save cash. Whilst the new deals are offering lengthy 0% balance transfer terms, card holders should be aware that the prevailing interest rates at the end of the 0% period are the highest they’ve been for ten years.

If you’re undertaking a credit card comparison of 0% balance transfer cards, look out for cards that offer the latest “positive payment order” (PPO) terms. If you select a card without PPO, and you then use that card to make new purchases or draw cash, you’ll end up paying off your 0% balance transfer debt ahead of your purchases, which will then be locked into the higher prevailing rate of interest.

As an alternative to Balance Transfer Cards if your credit score permits, take a look at the credit card deals on Black Credit Cards which are often offering the most competitive headline long term interest rates. However, you’ll need to have the correct spending profile and lifestyle to justify the annual fees that some of these cards charge and still be better off.

Statistically the UK’s 30 million credit card users are using them less, probably due to the ongoing press commentary that the “debt not save” mentality of the noughties got us into the credit crunch in the first place. Datamonitor, the financial information provider suggests the market will contract by 2.7% this year. This inevitably feeds through to lower profits for banks and credit card issuers.

It’s safe to assume as we’ve seen most of the High Street Banks returning to substantial profits, the credit card rate gap is at least partly responsible.

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