Capital One credit card users face a 7% hike in interest rates from September – nearly doubling the rates charged for many customers. It is the latest sign of a trend that is making the credit card habit much more expensive.
Despite Bank of England base rates remaining at an all-time low of 0.5%, banks are pushing up interest rates and charges on credit cards. According to Capital One, this reflects the rising cost of their own borrowing.
Card issuers are also concerned that the recession is causing more bad debts. Cynics believe that banks see cards as an easy way to boost profits in hard times.
0% is possible
It is still possible to get 0% on balance transfers and on initial spending with credit cards, but these deals are becoming harder to find. Analysis from MoneyExpert.com shows that of 165 zero per cent on spending deals available last year, 31 have since been withdrawn.
Worse still, the 0% period of the offer is often now shorter than before and followed by higher interest rates. Borrowers tempted to splurge on an interest free credit card will, on average, now pay nearly 18% on their account when the interest free period ends. That is very expensive money.
Other ways to earn profits
The card companies have found other ways of earning more profits from their customers. Cards may be offered as interest free on transfers, but they will probably come with a 3% charge on the transfer – so a borrower who transfers £2,000 to a new card faces a £60 hit for doing so.
There has also been a big increase in charges applied for using a credit card for cash withdrawals. According to a survey by price comparison website uSwitch.com, more than one in ten cardholders assume there is no charge to withdraw cash on a credit card. In fact, card issuers charge as much as 32% interest – and that is from the date of a cash withdrawal.
Using credit cards abroad can also be expensive. You may pay an extra £30 on every £1,000 you spend abroad, once you add up the currency conversion charge and exchange rate loading.
End of credit card cheques
Good news for consumers is coming, though, with one of the most dubious activities used by credit card companies about to be outlawed – the issuing of unsolicited credit card cheques. The Government announced earlier this month it intends to ban the practice.
Credit card cheques can are tempting – they feel like free money dropping onto the front door mat. They are anything but. A £500 cheque that is spent and not repaid in the first year typically costs the borrower £150 in fees and interest over that time, calculates Moneynet.co.uk.
The cheques are also vulnerable to fraud, if someone interferes with the mail. And buying items with the credit card cheques eliminates one of the benefits of using credit cards – joint liability for the supply of goods.
Where a credit card is used, the card issuer shares responsibility with the retailer for the goods or services bought. If the retailer goes bust without the goods being delivered, the credit card issuer will have to repay the cost. If you use a credit card cheque, the loss will usually be yours.
The end of free cards
The best way to use a credit card, if you can, is to fully repay the balance every month. Even then, though, a card is not necessarily free. Egg has just launched its Money World MasterCard, for which customers pay a £1 monthly fee. Other card issuers are expected to introduce similar charges, moving towards the ending of free credit cards.
But Egg is worth considering as it comes with some useful benefits, including personal travel insurance and free insurance on items purchased on the card, as well as a cash back on purchases. “As fee-paying credit cards go, £12 a year for the innovative new ‘packaged’ style credit card from Egg is a bargain if you use the benefits,” says Louise Bond of uSwitch.com. “With a 1% cash back facility the fee can be recouped by spending just £100 per month on the card.”
It is a good moment to take another look at the credit cards eating a hole in your pocket.
Some of the best credit card offers at present:
Tesco Personal Finance Clubcard MasterCard
0% on purchases for 12 months
Marks & Spencer Money MasterCard
0% on purchases for 10 months
Halifax All in One MasterCard
0% on purchases and balance transfers for 9 months – 3% charge on balance transfers
Virgin Money MasterCard
0% on balance transfers for 16 months – 2.98% charge on balance transfers
0% on balance transfers for 15 months – 3% charge on balance transfers
Source: MoneyFacts www.moneyfacts.co.uk
Question of Money
Q. I have been refused credit. What should I do to improve my credit rating?
A. The best place to start is to find out why you have been refused and what your current credit rating is. Ask the lender why they turned you down. Check your own credit rating at www.creditexpert.co.uk and www.equifax.co.uk.
Make sure you are on the register of electors at your current address. Failure to do this is likely to damage your credit status. If you have any old credit cards that you no longer use, write to the card issuer closing the account. (Don’t just cut-up the card – the card issuer won’t know about this and your vulnerabiity to fraud increases.) Lenders take into account your capacity to pay-off not only your actual debts, but also your entitlement to other borrowing – including credit limits on issued, but unused, credit cards.
Be very careful about shopping around for loans. If you apply for a loan, this will normally be marked on your credit record if you do not take it up – and others looking at your credit record may assume the application was rejected by the lender. If you want to compare loan terms you should specify you only want a quotation.
If you find any negative entries on your credit report, be willing to challenge these. You may, for instance, have withheld a payment when overcharged – ask the credit reference agency to record that this was a disputed bill and request the supplier to withdraw the adverse comment on your credit report. If you have been taken to court to obtain payment, ensure it is recorded that you settled the case.
Do not lie to improve your credit status, or hide existing credit agreements. To do so is a legal offence – and is likely to be found out.
Neil Munroe of the Equifax credit reference agency explains: “It may be tempting to stretch the truth on a mortgage application, but with all the cross-checking that is done by lenders, any anomalies will be found out. At the very least, the application refusal could work against someone’s credit score, but worse, a lender could decide to prosecute if they feel that a fraudulent application has been made and this could have a serious impact on an individual’s ability to get credit in the future.”