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True cost of those zero % credit cards: Banks hike rates in time for Christmas 

Banks are charging record-high interest rates on credit cards, prompting calls for a clampdown on ‘profiteering’ by lenders.

Shoppers now pay an average of 25.1 per cent on credit card purchases — the highest-ever figure, according to research group Moneyfacts.

It means that a customer who borrowed £3,000 and paid off £100 a month would pay £1,463 in interest overall and take three years and nine months to clear the debt.

Drastic plastic: Shoppers now pay an average of 25.1 per cent on credit card purchases — the highest-ever figure, according to research group Moneyfacts

Furthermore, research shows one in four shoppers will turn to credit cards to help fund Christmas. 

Individuals are expected to spend an average £660 this year, up from £538 in 2018, according to investment firm Hargreaves Lansdown.

Average card rates have soared since the financial crisis, climbing from 16 per cent in 2006. This is despite the Bank of England base rate plummeting from 4.75 per cent in 2006 to its current level of just 0.75 per cent.

Lenders argue that, unlike personal loans and mortgage rates, credit card charges are not very sensitive to changes in the base rate — instead, they are an assessment of how much risk borrowers pose, which is informed by their individual credit history and the overall economy.

However, former pensions minister Baroness Altmann claims concerns over debt don’t justify the hike in rates. ‘This is more about taking an opportunity to make excess profit,’ she says. 

‘More people are being encouraged to take out credit on credit cards, but the cost of credit is going up.’ 

The highest annual interest rate (APR) is a whopping 76 per cent on the British Airways American Express Premium Plus card.

Rates on reward cards are often higher, as borrowers are not expected to pay interest.

The idea is to use these cards for all your spending to earn as many points as possible, then clear the balance in full each month to avoid paying any interest.

But, if your circumstances change, or you overspend one month, you risk hefty charges.

The highest APR on a non-reward card is 29.9 per cent on HSBC’s Classic Credit Card Visa.

Baroness Altmann says the Bank of England’s attempt to stimulate the economy by lowering its base rate will not work if banks don’t pass on the cuts.

‘It’s great that Money Mail is highlighting this because banks won’t change unless there is more exposure,’ she adds.

‘They need to treat customers more fairly, which means not charging extraordinarily high interest rates when they are borrowing at much lower rates — that’s just profiteering.’

The trend has also been stimulated by a surge in introductory deals, which see lenders tempt customers by offering 0 per cent interest for a limited period.

The average term for these deals is now 311 days, up from just 128 in 2010.

Individuals are expected to spend an average £660 on Christmas shopping this year, up from £538 in 2018, according to investment firm Hargreaves Lansdown

Individuals are expected to spend an average £660 on Christmas shopping this year, up from £538 in 2018, according to investment firm Hargreaves Lansdown

The growth of these introductory purchase rates means that the banks are scrambling to make their money back when the offers expire.

Santander’s All In One Credit Card Mastercard offers 0 per cent interest for 26 months, before slapping customers with an APR of 21.7 per cent.

The bank’s World Elite Mastercard has an introductory 0 per cent term of 18 months — then an eye-watering APR of 49.8 per cent.

James Daley, of the consumer group Fairer Finance, says the problem requires ‘a major structural intervention’, including a cap on the length of introductory offers.

He explains that banks are making their money on people who are unable to switch to other 0 per cent deals because they have poor credit ratings. 

‘The model is broken,’ he adds. ‘The people who are paying for everyone else’s free debt are the people who can least afford to.

‘People who can afford it need to pay a reasonable amount for their debt. That probably means an end of 20- to 30-month 0 per cent deals.’

Moneyfacts finance expert Rachel Springall says that the best low-rate cards have also disappeared. ‘In the third quarter of 2019, Tesco Bank pulled its Clubcard Credit Card with Low APR Mastercard, charging 5.9 per cent, which was the lowest-rate card on the market.

‘Over the same quarter, Bank of Scotland, Halifax and Lloyds Bank increased the purchase rate on their credit cards, rising from 6.4 per cent to 9.9 per cent APR.’

According to the Finance & Leasing Association, households borrowed £4.4 billion on credit cards and personal loans in September, up 8 per cent in a year.

Peter Tutton, head of policy at debt charity StepChange, says credit cards are the most common cause of debt among its clients. 

More than two-thirds of new clients in the first half of 2019 had credit card debt, with an average outstanding balance of £7,500.

Mr Tutton says: ‘We are particularly concerned about subprime credit cards with higher interest rates of up to 69 per cent APR. 

These are often marketed as a way for people to build their credit scores, but are often damaging for an individual’s finances.’

A Financial Conduct Authority spokesman says: ‘We are currently engaging with the industry as it implements the remedies in our Credit Card Market Study, including intervening where we see unfair practices.’

m.dilworth@dailymail.co.uk

 

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