Moneyfacts issues default update
Two years on from the Office of Fair Trading’s (OFT) declaration that credit card default charges were too high, Moneyfacts has investigated how rates and charges have increased.
In April 2006, the OFT suggested capping these charges at £12. In the months that followed lenders cut these charges, but in an attempt to recoup lost revenue, they hiked rates and charges elsewhere.
Michelle Slade, analyst at Moneyfacts.co.uk, said: “In April 2006 the average purchase rate on a credit card was 14.9%, but today this has jumped to 16.4%. Previously whereas only a select number of customers were being penalised, now all borrowers are paying the price.
“For any customer who paystheir bill in full each month, the rate increase will have no impact, but with many households struggling with increasing financial pressures, those who only repay the minimum will be hardest hit. Anyone with a balance of £5,000 repaying just 2.5% per month will end up paying an additional £755 in interest from the 1.5% increase in purchase rates.
“The average interest rate for cash transactions have seen a marked increase from 18.1% to 24.3%. On top of this the majority of institutions have increased their cash advance charges. Previously the majority of institutions charged 2%, with a minimum of £2, now the majority charge 3%, with a minimum of £3.
“Taking cash out on credit cards has always been an expensive way of borrowing, particularly as interest is charged from day one, but with the 6.2% increase in the average rate customers who are relying on cash advances to balance their monthly budget it will make a bad situation even worse.
“Although rates and charges on credit cards have increased, there are still good deals to be found for those with a good credit history. Shop around and find a card that best suits your needs, whether it’s a balance transfer deal if you have an existing debt on a card, or a card with an incentive such as cashback if you pay your balance off in full.”