The big problem with relying on credit cards was dramatically highlighted last week by the report by Moneyfacts showing that several card issuers charge over 30% interest at a time when the bank rate is a mere 0.50%. Credit on cards has become more expensive, even while money has – theoretically – got cheaper.
What received less attention was a second, equally unpleasant, report. Equifax, which provides lenders with credit information on borrowers, warns that consumers are increasingly allowing credit card debts to pile up.
Credit cards are usually an expensive form of debt – even the average rate of interest according to the Moneyfacts’ report is 18.8%. That compares to a market leading personal loan interest rate of just 8.9% with Alliance & Leicester and Tesco.
Taking advantage of interest free transfers of credit card balances, or introductory interest free periods for purchases can be sensible – but once those interest free periods have ended the balance should be cleared if possible, or another interest free transfer deal used. The catch is that the number of interest free credit card deals is declining and eventually the balance must be cleared.
Many consumers seem to kid themselves about their ability to repay card debt. Equifax found that more than a third of credit card users are leaving 75% of their card balances to trail over each month, with many accumulating a growing debt burden.
‘Balancing act’
“These figures do illustrate the difficult balancing act that many individuals and families are having to cope with each month,” says Neil Munroe, external affairs director of Equifax. “Thirty two per cent of respondents said that they believe they are now more in debt than a year ago because of an increase in living expenses. And reducing repayments on credit cards appears to be one of the first tactics used to manage a dwindling family budget.
“I don’t think consumers are naïve – they know that reducing payments on credit cards is going to cost them in the long-run. But it seems they don’t feel they have much choice.”
Many consumers may not realise the very high rates of interest that can apply to credit cards. Anyone paying high rates of interest – especially if over 20% – should consider alternative borrowing arrangements. Members of credit unions might try to clear the balance with a loan from their union, others should see if they can clear their debt with a personal loan.
Steve Gracey, a spokesman for Alliance & Leicester, a subsidiary of Santander, says there is no reason why existing or new customers with credit card debts should not seek to transfer these to a bank loan at a lower rate of interest. “Our customers use their personal loan for a number of reasons, with consolidating debts from credit cards to a personal loan being one of the most popular,” he explains. “This gives them a fixed outgoing every month, a fixed interest rate and at the end of the loan period, the debt is completely paid-off. This can provide a significant cost saving for the customer.”
Loan drought
But according to a report just published by the Better Banking Campaign – a coalition of charities – consumers are finding it very difficult to obtain loans from the banks, forcing them into expensive alternative sources of finance. These include not only credit cards, but also doorstep lenders and so-called ‘payday loans’.
“Considering how much public money has propped up the financial institutions, it is deplorable that they aren’t currently supporting the people and businesses most in need in our communities,” says Steve Wyler, director of the Development Trusts Association, who is acting as spokesman for the Better Banking Campaign. “Most people believe access to bank accounts and affordable credit are basic rights, so we want to see this as a priority for all the political parties.
“We are not talking about lending for lending’s sake: we are talking about responsible lending to people and businesses who want to get on, who come from communities who would benefit greatly from better access to mainstream financial services.”
Q. The current Bank of England base rate is 0.5%, supposedly so the economy can recover. How can this help local business when banks charge them ten times this? Can nothing be done by Stormont’s politicians to ensure the low Bank of England rate is enforced?
A. There is no obligation on high street banks to lend money at the Bank of England base rate – and, as you suggest, none at present lends at anything like 0.5% to either businesses or consumers. In theory competition between banks drives down the rate of interest. But banks have had to increase the amount of capital they hold and competitive pressures on lending is very weak. Banks are also influenced by the fear of high levels of bad debts. In any case, savings rates and inter-bank lending rates (which are slightly above the base rate) are more relevant than the base rate in determining lending rates, as these determine the banks’ cost of money. Many savings rates offered by the banks and building societies are low at present, but the best are far above the base rate. The State Bank of India is offering a savings product paying 5.25% and Nottingham Building Society pays 5.01% on its regular savings plan. Stormont politicians have little influence on banks’ lending practices, or the interest rates they charge. The British Bankers’ Association insists that banks are making loans available to businesses and consumers.
Best buys
Credit cards – interest free on purchases
Tesco Bank
Clubcard Mastercard 0% on purchases for 12 months – then 16.9% APR
Sainsbury’s Finance
Mastercard 0% on purchases for 10 months – then 15.9% APR
M&S Money
Mastercard 0% on purchases for 10 months – then 15.9% APR
Credit cards – interest free on balance transfers
Virgin Money
Mastercard 0% balance transfer for 16 months – then 16.6% APR
Barclaycard
Platinum Visa 0% balance transfer for 15 months – then 15.9% APR
Santander
Mastercard or Visa 0% balance transfer for 15 months – then 15.9% APR
Credit cards – standard cards
Co-operative Bank
Platinum Tracker Visa 0.5% for 6 months, then 7.7% *
Barclaycard
Platinum Simplicity Visa 7.8% **
Barclaycard
Goldfish Mastercard 0% for 3 months, then 9.9% **
* Minimum income £25,000
** Minimum income £20,000
Unsecured personal loans
Alliance & Leicester 8.9% *
Tesco Bank 8.9% *
Post Office 9.9%
*Subject to credit rating
Supplied by Moneyfacts.co.uk