Credit card interest rates hit a record high this month despite a record low base rate as providers hiked the cost of borrowing for those with poor credit histories or turned down by mainstream banks.
The average credit card purchase APR now stands at 25.5 per cent, up from 24.1 per cent last June, after the credit card provider NewDay upped interest rates on its Aqua and Fluid cards last month to 37.9 per cent and 34.9 per cent, according to financial information site Moneyfacts.
While interest rates on mainstream credit cards haven’t budged much, providers could increase rates as they expect rising defaults on the back of millions more people becoming unemployed or suffering a hit to their incomes.
Those turning to credit cards to fund essential spending over the next few months are likely to find the cost on their statement each month will have gone up
The hike in APRs on so-called sub-prime credit cards, aimed at those who don’t pass credit checks elsewhere and can’t get mainstream cards from the UK’s big banks, may also prove an issue for cash-strapped households if they find themselves turning to them more often.
Andrew Hagger, founder of personal finance site Moneycomms, said: ‘With the exception of Barclaycard, the interest rate on mainstream credit cards is the same as it was in January.
‘However, with card lenders facing the prospect of a massive rise in bad debts due to the coronavirus impact on the economy, I expect to see lenders increase rates during the second half of 2020.
‘As the recession bites and unemployment soars, card companies will feel the brunt and may increase pricing to help protect their margins but also to put a dampener on demand for credit.’
Banks have already sought to reduce the number of applications they receive from new customers by consistently reducing the availability and length of interest-free balance and transfer and purchase deals.
The number of 0 per cent credit card offers hit yet another record low this month, and there are now just 53 balance transfer offers and 54 purchase deals, according to Moneyfacts. This is down from 86 and 77 last June, respectively.
Moneyfacts’ Rachel Springall said: ‘As uncertainty builds surrounding consumer debt, this shake-up of the credit card market could not come at a worse time.
‘Borrowers may well use credit cards as a way to spread the cost of their purchases, but for those struggling with debt or have had their personal circumstances change in light of the coronavirus pandemic, these debts could hang overhead for much longer than they expect.
‘Credit card providers act quickly when the risk to take on debts escalates and right now there is a refocus of credit card propositions to mitigate debt write-offs.
‘This echoes the movements seen after the financial crash – indeed, between June 2008 and June 2009, the number of 0 per cent purchase cards fell from 112 to 85.’
Banks are also constricting interest-free offers as they focus more on existing customers taking three-month payment holidays, which are due to come to an end next month.
There were 877,800 frozen credit cards and 608,000 frozen loans at the end of May, according to the trade body UK Finance.
Virgin Money has reduced the length of many of its interest-free deals over the last month to manage the demand from new customers as other banks also cut the length of 0 per cent terms, but denied it was primarily to do with dealing with customers’ payment holidays.
It said in a statement: ‘We keep our products under regular review, taking competitor product withdrawals and price changes into consideration to ensure we offer competitive products to meet a range of customer needs, balancing demand with providing the best level of service for our customers, and meeting our lending objectives.’
While the rising cost of credit and the disappearance of interest-free deals was not a huge issue during the coronavirus lockdown, with figures from the Bank of England finding both March and April saw credit card borrowing fall by record sums, as people lose jobs and incomes it will cost them more if they need to turn to credit cards and loans to fund essential spending.
Moneyfacts last week found the average cost of borrowing £5,000 over three years increased from 7.1 per cent to 7.4 per cent between January and June.
|January 2020||March 2020||May 2020||June 2020|
|£5,000 over three years||7.1%||7.1%||7.3%||7.4%|
|£7,500 over five years||4.6%||4.6%||4.4%||4.5%|
|£10,000 over five years||4.5%||4.5%||4.5%||4.5%|
Banks including Barclays and Sainsbury’s Bank have increased the representative APR, which is given to 51 per cent of accepted borrowers, on loans of between £5,000 and £7,500 over the last few months.
Sainsbury’s Bank put up the cost of its loans now open only to Nectar customers by 3.3 percentage points in mid-May, nearly doubling them to 6.9 per cent.
This is despite the Bank of England cutting its base rate to a record low of 0.1 per cent in March in response to the coronavirus, which should reduce the cost of borrowing.
Banks have also slashed their savings rates to record lows over the last three months.
The Bank of England cut its base rate to a record low in March. But despite mortgage and savings rates falling, unsecured credit costs are rising as banks expect more defaults
Andrew Hagger added: ‘Base rate may be at a record low but there’s a tsunami of defaults and bad debts on the horizon, so it’s not surprising that lenders are pulling 0 per cent cards left, right and centre and raising rates in an attempt to boost margins but also to dampen demand for new applications.
‘Sub-prime cards will no doubt become more popular as consumers with damaged credit records are turned down by mainstream lenders and it is these sub-prime products where I expect interest rate increases to be most severe.’
Rachel Springall said: ‘In the months to come we may see the credit card market contract further, so if borrowers are in a position to do so, now may well be the time to act to get the best deal they can.
‘To put them in the most favourable position before they apply for credit, consumers could review their credit score, such as with Experian.
‘If consumers have any disposable income, it is a wise idea to overpay their card and consider setting aside some savings as an emergency fund for the future.’
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