Credit card rates 'highest in 12 years'

According to research carried out by the financial information service - Moneyfacts, Interest rates on credit cards are at their highest level for 12 years.

Moneyfacts said that on average, credit card rates have steadily climbed up to 18.8% in February, despite the Bank of England base rate remaining at its lowest level in history at 0.5%.

Credit card providers have been increasing up due to to fears that borrowers are more likely to default, especially during the downturn.

But recent figures from the Bank of England indicate that the situation is not as severe, with rates at their highest in just three years.

The figures revealed that there was a significant rise in the amount of money that banks had written off as bad debts on credit cards.

This suggests that a key factor for the rising interest rates is due to the spike in borrowers defaulting on their credit card debts, which has resulted in a widening gap between current credit card rates and the base rate, which has remained at 0.5% since March 2009.

According to the Bank's figures, write-offs doubled to £1.6bn between April and June last year, as banks acknowledged that the defaulting borrowers would never repay this money.

During each of the following two quarters, around £800m was written-off. Write-offs amounted to £3.2bn in 2008.

The Bank of England's figures show that on average, interest rates on credit cards offered by banks and building societies have risen to their highest level since June 2006.

The rate was 16.4% at the end of January..

However, the figures from Moneyfacts show that the typical interest rate on credit cards is in fact higher, at 18.8%.

This may be because the Moneyfacts figures show the current quoted rate from providers charted on its database, whereas the Bank of England looks retrospectively at the interest rate charged in the previous month.

Michelle Slade from Moneyfacts said: "The UK continues to suffer from a high level of unemployment and providers are worried about the increased risk of customers not repaying their debts,

"This increased risk continues to be passed on to both new and existing credit card customers through higher rates."

She pointed out that someone with £5,000 debt of debt on a credit card, who only paid off the minimum payment every month, would now have to pay an extra £2,289 theoughout the life of the debt than they would have had to in February 2006.

However, the Finance and Leasing Association (FLA) said that some credit card providers had actually lowered their rates.

"Lenders must price responsibly in a challenging market and ensure that, so far as possible, the rates they charge reflect the risk they face. That is why some customers have also seen their interest rates fall," said Fiona Hoyle, of the FLA.

"It is also important to recognise that the average APR figure from Moneyfacts excludes 0% deals on purchases and transfers and does not take into account rates for existing customers."

Barbara Scottu, credit card expert at Which4U said: “Although many providers have increased their borrowing rates, there are still some great 0% credit cards available, allowing borrowers to pay no interest for a set period of time,

“With many companies competing to offer the longest 0% durations, you can actually cut out interest all together, provided you pay off the balance in full before the 0% period expires.”

The leading credit card for 0% on balance transfers is currently the Virgin Money credit card, offering 16 months, plus 3 months 0% on purchases.

If you're looking for a card that offers a long 0% purchases period, the BT 0% Purchases card comes with 10 months at 0%, as well as 6 months 0% on balance transfers.

Written by Sam Gooch