Campaigners are calling for new legal caps on “sky-high” credit card interest rates, which have reached their highest levels in more than two decades.
Figures from the Bank of England show that the average annual interest rates offered on credit cards have reached 21.49%, down from a base rate of just 0.1%. This was the highest average credit card rate since December 1998.
Michael Donald, former director of Visa UK and founder of UK digital payments app ImageNPay, said it was difficult for the financial industry to justify interest rates above 20% when the base rate is at a historically low level. He said: “If the Bank of England base rate is the lowest on record, how can you have a credit product that pushes people into more debt as rates keep rising?
He said consumers should consider whether they need to have credit card debt when personal loans can be obtained with annual interest rates as low as 2.8%. The various payment options now available to consumers have raised the question of whether it is time to “scrap the credit card,” he added.
In October 2001, credit card interest rates were 18.1%, while the bank base rate was 45 times higher than it is today at 4.5%. Financial experts say that the interest rate on credit cards is also linked to the risk of consumer default.
UK consumers owe around £ 57.9 billion on their credit cards, which works out to around £ 2,080 per household, according to Bank of England data. The most recent figures from UK Finance, the trade association for the financial industry, show that there were 334 million credit card transactions in August with a total spend of almost £ 17 billion.
Victoria Sully, 36, of Newquay, Cornwall, who runs the Lylia Rose’s Lifestyle Blog, accumulated £ 17,500 in credit card and credit card debt in just two years after starting his theological studies at the University of Gloucestershire.
She said, “I just got to the point where I couldn’t even make the minimum payments anymore. I felt like I was never going to get out of it and that I was going to have to go broke. I felt really weak and couldn’t really see a way out. It is very easy to get addicted to spending and put it on a credit card. It does not seem to spend. We are tempted all the time because there are pubs everywhere.
Sully enlisted the help of Citizens Advice and a debt management company, who helped her with a repayment plan. She has paid off her debts in five years and now provides online financial management advice.
The lockdown has offered a chance to save money for better-off households, and around £ 14bn in UK credit card debt has been paid off since February last year.
Charities, however, warn that some of the poorer households have resorted to credit cards to help pay for living expenses. Research published in October by the Joseph Rowntree Foundation found that 4.4 million low-income households had to take out new loans or increase their borrowing during the pandemic. The annual percentage rate (APR) on cards for customers with a low credit score can be as high as 59.9%.
Joe Cox, senior policy advisor at the Jubilee Debt Campaign, a charity that fights against unfair debt, said: “We are in the throes of a household credit crunch and it is focusing on low income people whose situation is worse than before. the pandemic. They are being made to pay exorbitant prices.
Cox said the government should now place the same financial restrictions on credit card companies as it does on payday loan providers. The Financial Conduct Authority (FCA) imposed new rules on payday lenders in 2014, under which they could never charge more fees and interest than the amount borrowed.
Bank of England credit card loan data is a monthly weighted average interest rate based on advertised APRs from credit card lenders. The high credit card rates are also reflected in APR data released by Moneyfacts, the financial data firm, which recorded a rate of 26.4% in October, the highest rate since it started recording. figures in 2006. It also includes annual fees and other charges. in its tariffs.
UK Finance said: “Credit cards can be a useful way for people to manage their finances and to spread the costs of large purchases. Pricing decisions are the business of individual card providers, but the base rate is only one of many factors that affect the cost of most credit cards.
An FCA spokesperson said, “Our rules help solve credit card debt problems. Credit card companies need to help borrowers with 36 months of debt pay off their debt faster. “