Why is my credit card rate rising?
Monday, 23 February 2009 11:30
Credit card holders are starting to receive letters announcing sudden hikes in the amount of interest they have to pay on their balances.
This comes despite government intervention at the end of last year to force the credit card industry to play fair.
Are there any cards out there that still offer low rates, or is there anything customers who feel they have received a raw deal can do?
Sarah Routledge looks into the credit card market.
Despite evidence consumers paid off more of their credit card debt than they put on over December, UK credit card holders still spent £126.3 billion on credit cards over 2008.
But as job losses rise and defaults on loans are expected to increase, lenders have been keeping a closer eye on their customers. As a result, many credit card holders are receiving letters informing them of large hikes in their APR.
Moneynet.co.uk research reveals that the average purchase rate on credit cards has increased from 16.77 per cent to 17.48 per cent (+0.71 per cent) over the last 12 months and cash rates, while the Financial Ombudsman has seen one case where the interest rate shot up from 19 per cent to 29 per cent.
Andrew Hagger of Moneynet, says: "The trend to lure customers with attractive 0% deals continues unabated, but it's when the introductory honeymoon is over that consumers are being hit hard with a seemingly endless stream of rate and fee increases."
The most recent rise has come from Egg, which has been working to reduce the risk it faces from existing customers by offering new, higher rates.
Around half a million Egg customers have had their APR increased by up to seven per cent, angering consumer groups and customers alike.
"It feels like blackmail," one customer said on a Moneysupermarket.com forum.
"I've been a customer for years, and they haven't done too badly out of me!"
Martyn Saville of Which? Money, says: "The message from Egg is clear - pay up or go elsewhere.
"Egg is still advertising the same interest rate to new Visa customers as it was a year ago, suggesting it may be trying to clear out a swathe of non-profitable or higher-risk existing customers to make way for new ones."
'Fair principles' for credit cards?
However, since the credit card industry agreed a set of "fair principles" with the government in January, credit card customers at least have the option of freezing their current interest rate.
Customers can continue to make their monthly payments until the balance is paid off.
But they cannot make any new payments using the card, and when the debt is cleared, the account is closed.
The rules also state that credit card providers can only increase rates twice a year, and they must give one month's notice, while customers cannot have the rate raised in the first year of taking out the card due to risk-based re-pricing.
Not only are credit card companies increasing the interest rate for existing customers, they are raising it at different rates.
While some customers found their rates rose a couple of per cent, others were hit with the maximum seven per cent.
A spokesperson from card trade association Apacs says credit card firms will offer different rates depending on a customer's risk.
Credit card providers have to give customers the opportunity to shop around by giving them notice and allowing them to freeze their current rate, Apacs adds.
"We have found that only 25 per cent of people know their APR. But it is important to know this as then they can make a decision whether to shop around."
Shop around for a better rate
Which? also recommends customers who are unhappy with rate increases to shop around and find a new card, and if they have an outstanding balance, contacting their provider to freeze the current rate.
If you have had your rate increased and you are not happy about it, you may have grounds for a complaint.
Credit card providers must abide by the terms and conditions set out in the contract, and if they have altered the APR because of a risk-based re-pricing, they must be able to show why.
The Financial Ombudsman Service has already received so many complaints it has referred the matter to the Office of Fair Trade.
So far, "well over half" of these complaints have been upheld, a spokesperson says.
"What we look at is whether that rate increase was truly about the risk of that customer.
"If this is risk-based re-pricing, we want to know what these risks are, how they were assessed and how they are being assessed now.
"Where the customer's contract allows for the credit card provider to unilaterally increase the rate, we are looking into the contract terms and conditions to make sure they comply with the rules."
If your credit card provider claims to have increased your rate after a risk assessment and you believe nothing has changed in your circumstances, you should lodge a formal complaint with your card provider, the Financial Ombudsman recommends.
Customers who are not getting anywhere with their credit card company can contact the Financial Ombudsman, who in most cases can broker an agreement between the customer and the company in a dispute.
Are there any good credit card deals left?
There are still plenty of deals out there for customers who are no longer happy with their credit card provider, according to Michelle Slade from Moneyfacts.co.uk.
Ms Slade recommends you think about what you want out of your card, then compare the market to get the best deal.
"If you have a balance you need to get down, a balance transfer card is good. If you pay off your balance in full, you could look into a cashback card."
Moneyfacts says Virgin Money is offering a credit card with 0% on balance transfers for 16 months - subject to a 2.98 per cent fee - while American Express has one of the best cashback offers on its Platinum card, with five per cent cashback on all purchases for the first three months.
Cards with a low introductory rate, or cashback, often come with a higher APR at the end of the initial period, however.
Recently introduced Halifax Easy Rate credit card has a typical rate of 8.9 per cent APR, while Barclaycard has a Simplicity card with just 6.8 per cent typical APR.
But don't wait for a letter from your credit card provider before you make a move. Competition is still fierce within the industry, and if you use a credit card, it may be worth shopping around to make sure you are still getting the best deal.
Sarah Routledge
Comments
Newsletter sign up