Credit card warning as rates hit record high – ‘vital’ moves to make NOW to reduce borrowing costs

THE cost of borrowing money on a credit card has hit a record high, new figures reveal.

Interest rates on purchases reached 35.3%, on average, in June this year, according to Moneyfacts.

It’s the highest APR (annual percentage rate) since its electronic records began back in June 2006.

The APR indicates the cost of borrowing over a year, including the interest and any fees.

For instance, borrowing £1,000 at the average rate of 35.3% would cost you £1,173.49 in total.

Moneyfacts said that a combination of card withdrawals and interest rate rises have all contributed to this change in its latest unsecured lending trends treasury report, which analyses the cost of credit cards and unsecured personal loans.

The average rate at the same time last year was 31.2% and 26.7% in 2022.

The Bank of England (BoE) has left interest rates unchanged at a 16-year high of 5.25% since August last year.

The base rate is used by banks and lenders to set the rates they offer to customers, including loans and credit cards,

Although the rate has remained unchanged, it is far higher than the historic low of 0.1% in December 2021, pushing up borrowing costs.

The exact rate you get on a credit card depends on your circumstances though and shopping around can still get you a better deal than the average rates.

According to Moneyfacts the provider with the lowest purchase APR and purchase PA currently is from The Co-operative Bank’s 3-year fixed rate Visa at 8.9%.

At the other end of the scale, American Express‘ Platinum credit card has a whopping APR of 704.6% and PA of 31%.

Meanwhile, the number of interest-free purchase offers stalled at 58 in the three months to June.

It means there are fewer options for borrowers to choose from than a year ago, down from 67 offers to 58.

A 0% purchase card is a credit card that lets you make purchases for a fixed amount of time without charging you interest.

The length of the zero-interest periods went up slightly to 264 days, up from 255 days in March and 249 in June 2023.

The number of interest-free balance transfer offers fell from 61 to 60 between March and June this year, and from 73 a year ago.

With a 0% balance transfer you get a new card to pay off debt on old credit and store cards, so you owe it instead, but at 0% interest.

The average term length increased to 522 days, from 517 in March, but was down from 553 this time last year.

The fees for transferring a balance went up to 2.42% on average, from 2.40% in March and 2.26% a year ago.

Rachel Springall, at Moneyfacts, said: “The cost to borrow on credit cards has reached a record high, making it vital for borrowers to repay their debt if it’s bearing interest, or switch it to an interest-free offer.

“However, the cost to transfer debts has also risen over the past quarter, and consumers looking for a 0% purchase offer will find the availability of products stalled.”

Rachel added that due to increased prices in recent years, borrowers might be more likely to turn to short-term credit, such as a credit card or their overdraft.

But because of the rise in the cost of interest, these kinds of options “should only ever be used temporarily” to cover essential or unexpected expenses, she said.

She also explained how a recent study by UK Finance revealed that over the year to February, outstanding balances on credit card accounts grew by 9.5%.

Rachel said: “As the number of 0% purchase deals stalled this quarter and the number of 0% balance transfer offers fell, providers may well be cautious surrounding such a rise and conscious of those who remain in persistent debt.

“Borrowers will need to carefully plan their repayments to ensure they are in the best possible position to pay off their debts as soon as they can.”

One way to do this quickly, she said, is to change a minimum repayment to a higher fixed sum every month, which can be changed back should the need arise.

Borrowers should carefully compare the length of any 0% offer before committing to taking out a new credit card.

We spotted a deal last week Virgin Money’s new 0% balance transfer card gives all accepted applicants 28 months to repay money shifted onto the credit card without charging any interest at all.

You will have to pay a 3.25% fee on debt moved to the account.  On a balance of £1,000, this would work out as £30.25.

PERSONAL LOANS ALSO UP

The cost of personal loans has also increased dramatically this year, according to Moneyfacts.

Individuals looking to borrow £3,000 over three years face an average rate of 17.2%, compared to 16.4% this time last year.

Those wishing to borrow £5,000 over three years are facing an average rate of 11.7% compared to 9.4% a year earlier.

This is its highest point in over 10 years when it stood at 11.7% back in March 2013.

The average rate on a £7,500 loan tier now stands at 8.6%, compared to 5.2% in June 2022.

And the average annual rate of interest on the £10,000 loan tier sits at 8.6%, versus 5.2% last year.

However, it’s worth noting that the average unsecured personal loan rates for £3,000 over three years, £7,500 over five years and £10,000 over five years have fallen during the second quarter of 2024.

Rachel said: “An unsecured personal loan could be ideal for borrowers who want a fixed monthly repayment plan and know exactly when their debts will be repaid.

“However, the cost to borrow £5,000 over three years has risen to its highest level in over a decade. Borrowers will need to decide whether a loan is the right choice versus a more flexible credit card, but they can seek advice if they are unsure.”

If you’re struggling, getting advice from a debt charity or asking for support from an existing lender is “always wise” to better manage repayments and find out ways to avoid high-interest charges, she added.

While borrowing sounds might sound like a simple way to get out of a tight spot – it’s not worth falling into debt over.

It’s vital to ask yourself if you actually need to borrow before committing to a new credit card or personal loan.

If you can’t afford to pay off a debt, then you should avoid taking out any more debt at all costs.

We’ve previously warned that Brits will find it harder to borrow as rates rise.

And many could be forced to borrow money from the unregulated buy now pay later sector or through riskier and more costly payday loan firms – but we’ve warned against this.

How can I reduce borrowing costs?

The first thing borrowers can do is try to improve their credit scores.

Boost your credit score

Getting on the electoral register is a must when it comes to building a decent credit score.

This proves who you are and where you live meaning it’s easier to get credit if you’re on the list.

It is also wise to check the electoral roll for any errors. You can sign up by registering to vote.

Don’t make too many credit applications as it can be seen as a sign of financial distress – and each application will be recorded on your file.

Use a “soft-search” eligibility calculator to show how likely you are to be accepted.

Always pay your bills as late payments are also recorded in your file.

Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.

The best credit card deals – with the lowest rates, biggest limits, cheapest fees and longest interest-free windows – are reserved for those with top-notch credit scores. 

Lighten your loans

If you took out a loan a couple of years ago, it may be worth searching for a better deal.

Using a new loan at a lower rate to pay off an old one can sometimes make sense.

But remember, not everyone gets the rates advertised by lenders, as these are reserved for those with good credit ratings.

Check which loans you’re most likely to get without damaging your score by using an eligibility tool such as the one on Compare The Market or MoneySavingExpert.com.

Blitz your credit card balance

Do not let credit card debt linger. If you’re just paying the minimum each month, it could take decades to clear.

Only making the average 2.5% minimum monthly payment on a £5,000 balance means it would take you nearly 38 years to pay back and cost nearly £15,000 in total, on a typical interest rate of 22%.

Switch to a balance transfer credit card to get a window of up to 34 months with no interest charged.

Break the total debt down into monthly payments and set up a direct debit to ensure you wipe the balance in that time. If that’s impossible, try to switch again to a new card.

However, not everyone can get the top balance transfer deals, as they require an excellent credit score.

Find out which cards you’re most likely to get with the eligibility checkers on Go Compare or Uswitch.

Obliterate overdraft charges

Dipping into your overdraft can be one of the priciest ways to borrow, with some banks charging 40% interest – almost double the average credit card rate.

Move to a bank with a free overdraft. To pay off larger overdraft debts, a money transfer credit card could give you an interest-free respite, but beware of high fees.

How can I get debt help?

If you’re in debt there are plenty of services you can take advantage of and they offer free advice on how to manage debt.

Most of them can offer you free guidance and help in person, over the telephone or online.

• Money Helper – 0800 138 7777
• Citizens Advice – 0808 800 9060
• StepChange – 0800 138 1111
• National Debtline – 0808 808 4000

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.

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