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Why are credit card rates on the rise?

Simon Gompertz
Working Lunch

wallet
Interest on card payments is rising.

More of you have got in touch to say that despite official interest rates coming down, some of your credit card rates are actually going up.

After Robin Ralia complained about his Amex card, we had a flurry of messages from viewers wondering why they have been targeted.

Sue McGie reports that interest on her Sainsbury's Visa card has gone up 5% to 18.95%. And Anthony James has been been hit by a 6.5% hike from HBOS, pushing his rate up to 21%.

What's going on? It's partly that individuals are being picked off by credit card providers. And it's partly that average rates have been on the up as well.

Rates on the move

interest rates graph
Interest rates are down but credit card rates are up.

Take a look at our up-to-the-minute chart from Moneyfacts, which illustrates the fact that the Bank of England and the card industry have been travelling in the opposite direction.

Since Nov 2007 base rates have gone down from 5.75% to 1.5%, but average new credit card rates have gone up from 16.5% to 17.7%. Yikes!

Ask credit card insiders and they will tell you that their rates have never tracked the Bank of England's base rate. And, they add, average rates are lower than a decade ago.

Cards rely on interest

The key point, though, is that the card providers rely on interest more than ever to pay the growing bill for bad debts and fraud. This is since their income from hefty penalty charges was capped at 12 a time.

Hence, while base rates are on the way down as the Bank of England's response to the recession, credit card rates are staying high to cover the non-payers thrown up by - you guessed it - the recession.

But there is a creepy side to this credit card tale which has already caused a big rumpus, along with an attempt at a clampdown from the Trade Secretary, Peter Mandelson.

Rate assessment

Individuals are being targeted with their own specially tailored rate hikes, the result of a technique called risk-based pricing.

Increasingly, card providers have been charging a higher interest rate if they think you are a higher risk, both when you apply and while you have the card.
Simon Gompertz

Increasingly, card providers have been charging a higher interest rate if they think you are a higher risk, both when you apply and while you have the card.

How do they assess the customer? At the application stage, they consult a credit reference company and pose questions about income, home ownership and debt problems.

Then, once you have been accepted, they can track your spending, any missed payments and how much you borrow.

Some people have faced sudden increases of 10% or more in the interest charged on an outstanding balance.

Fair play

Faced with the charge that they had found a sneaky way to fleece the customer, the card companies made a deal with Mr Mandelson, promising to apply "fair principles" to the whole process of setting risk-based rates.

They would give notice of changes and provide alternatives to the customers affected. Nothing could be altered for the first 12 months and thereafter there would have to be 6 month intervals between rate hikes.

The new rules were implemented from 1st January and you can view them here:

Current low interest cards (13/01/09)
Barclaycard Simplicity 6.8%
Capital One Platinum 8.5% Fixed
Co-op Bank Platinum 9.9% Fixed
(Source: Defaqto)

For anyone looking to avoid high standard rates of interest, the current lowest rates are on Simplicity from Barclaycard, at 6.8%, and on Capital One and Co-op's Platinum cards, according to the financial information firm Defaqto.

Plenty of card junkies still hop from one short-lived 0% offer to another. But beware of transfer fees every time you move.

The best strategy, if you can manage it, is never to borrow on a credit card for more than the usual 56 day interest-free period.

Credit cards are great for spending, but terrible for borrowing.



SEE ALSO
Credit card rates 'must not rise'
30 Dec 08 |  Business
Mixed reaction to card deal
12 Dec 08 |  Business


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