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Credit cards: why are borrowing costs on the up?

A credit card in a keyboardSavings rates remain at record lows, but credit-card costs are soaring. We look at some of the reasons why.

The Bank of England base rate has been stuck at a record low for almost two years, interest paid on savings is at rock bottom – but the cost of borrowing on a credit card just keeps on rising.

The latest figures from financial analyst Moneyfacts show that the average annual percentage rate (APR) on a card is now 18.9 per cent – the highest level this century, and way above the 0.5 per cent base rate.

We talked to’s head of credit cards, Chris Griffiths, and asked: why is spending on plastic so expensive – and how can banks justify these eye-watering APRs?

Economic conditions

Griffiths says that the base rate is only a small part of the calculation when banks decide how much interest they should charge credit-card customers.

The current poor economic conditions, for example, have much more of an impact on borrowing costs.

“APRs are probably staying high due to the increased credit risk associated with a weak economic forecast,” explains Griffiths. “Money is tight, jobs are at risk, and this results in people being either unable or unwilling to pay off debts.”

The credit crunch was caused, in part at least, by banks failing to predict the risk of people being unable to repay debts – in particular in the American sub-prime mortgage market.

“So if credit-card providers get the pricing wrong, by not correctly forecasting the risk, they could end up with far more bad debts than anticipated.

“If they have lent a lot of money on this bad forecast the problem is amplified and you end up with a credit-crunch type scenario.”

As a result, more and more applicants are being offered cards with APRs based on their own credit score. If your credit record is damaged in any way – for example if you’ve missed loan repayments in the past – you are likely to be offered higher rates or turned down altogether.

Use’s Card Matcher tool to see which cards you’re likely to be accepted for; this way you don’t run the risk of sending multiple applications and hurting your credit file.

Other factors

As well as the state of the economy, lenders have to factor in other operational costs when setting rates.

For example, if a bank is offering some cards at 0 per cent interest for a period, the cost of doing so has to be effectively subsidised by charging higher rates to other borrowers.

Griffiths adds: “There are other things to take into account, such as marketing and TV ads, and servicing customers with call centres and high-street branches.”

Banks also face new requirements from financial regulators to hold larger amounts of capital to protect against bad debt – and this adds to costs too.

New regulations hit profits

This year has also seen the introduction of a number of new rules aimed at protecting credit-card customers from some dodgy money-making practices.

For example, lenders must now allow borrowers to repay their most expensive debts first (say if they have a 0 per cent balance transfer with new spending accruing interest at the normal rate).

And from next month, banks will have to ensure that any minimum monthly repayments go at least some way towards clearing debts (rather than just covering fees and interest).

Both these measure will affect credit-card providers’ profitability – and could well result in further increases in APRs.

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Chris Torney

Chris Torney

Chris is the former personal finance editor at the Daily Express. He's been a journalist for more than 10 years and contributes to a wide range of finance and business titles.Read more from Chris

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