Spending on credit cards has become more expensive since the credit crunch began. Here’s how to cut your interest bills.
The credit crunch has turned out to be great news for credit-card providers. With the Bank of England base rate falling to a record low but interest charged to borrowers rising, lenders have seen their profit margins widen considerably.
Recent figures from charity the Money Advice Trust showed that in June 2008 – a couple of months before the banking sectors in the US and UK went into meltdown – the average annual interest rate on a credit card was 12 per cent, while the base rate stood at 5 per cent.
Two years later, and despite repeated falls in the base rate to its current level of 0.5 per cent, the average interest on plastic has risen to 12.4 per cent. This has taken the average margin on cards from 7 per cent to more than 12 per cent.
At the end of 2008, with lenders starting to raise rates despite the falling Bank of England rate, Labour minister Lord Mandelson called on card providers to curb increases in the cost of credit – but, clearly, to no avail.
And with interest rates forecast by many to start rising again in the coming months, borrowing on cards is likely to get pricier still.
Not all bad news
While average rates may be heading in the wrong direction, there are a greater range of cards now offering temporary low-interest deals – so if you’re disciplined you should be able to reduce your cost of credit.
At the start of 2010, only three providers were offering cards with interest-free introductory periods. Today there are five times as many: for example, Tesco Bank has a card which lets you spend at 0 per cent for the first 13 months. Rival Sainsbury’s Finance is offering the same deal for 12 months, while a number of providers have zero-interest periods of 10 months.
If you need to move an existing debt, the number of balance-transfer cards has also increased.
The likes of Nationwide, Virgin Money and Egg are all offering interest-free periods of more than a year on transfers – although you will be charged a fee of around 3 per cent of the sum transferred. So if you move £10,000, for example, you’ll pay £300 for the privilege.
Will I be accepted?
These deals sound generous, but the fallout from the credit crunch means that banks are much stricter about who they’ll lend to, and the number of applications declined has risen.
Confused.com’s Card Matcher Tool helps you see which cards you are likely to be accepted for, based on your credit profile, and without damaging your credit history.
Normally the only way to see whether you’ll be accepted for a card is to make an application – but this will be recorded on your credit record, and can lead subsequent lenders to view you as a higher risk.
By using Card Matcher, you can ensure this doesn’t happen.
Watch out for the catch
So why are these profit-hungry lenders offering cards with no interest? The answer lies in the rate of interest that is charged once the zero per cent period ends, known as the revert rate.
For example, Tesco’s interest-free card reverts to 16.9 per cent annual interest after 13 months are up, which is fairly typical: most of the best-buys mentioned above revert to rates between 15 per cent and 20 per cent.
Lenders rely on their customers failing to pay off their spending or transferred balances by the time the revert rate kicks in, as this is when the interest charges – and therefore profits – start to mount up.
So if you want to take advantage of these offers, you need to make every effort to clear your debts before the low-interest period is over.
Rates correct at the time of publishing
