Money

Credit card warning as interest rates reach record high – how to avoid paying more

by
Super Educational
December 12, 2022

BORROWERS are facing a rise in costs, with credit card rates reaching a record high.

The high cost of borrowing will push up household bills even further this Christmas as Brits battle an already bleak cost of living crisis.

The cost of borrowing is predicted to rise even further into next year

Credit card APR’s reached record highs this year

Financial specialists at MoneyFacts have released new data on the cost of credit cards and unsecured personal loans in their Unsecured Lending Trends Treasury Report.

And the average rate across all types of credit cards including fees has hit a new high of 30.3%.

The figures come more than a month after the Bank of England hiked the base rate to 3% – the biggest interest rate rise in 33 years.

The central bank increased interest rates to help control rampant inflation which is currently sitting at 11.1% – a 41-year high.

And borrowing costs are expected to rise once again on Thursday with the Bank of England expected to increase rates by 50 basis points to 3.5%.

In turn, this reduces people’s disposable income and may result in households borrowing cash at high rates to pay for Christmas.

Rachel Springall, finance expert at Moneyfacts, said: “The cost to borrow on credit cards has reached a record high, with both the average purchase APR and the average purchase per annum rate increasing during the final quarter of 2022.

The average annual rate of interest for credit cards has risen by 4.1 percentage points from 26.2% in December 2021.

It comes after American Express entered the arena with a new card charging 439.9% APR.

Ms Springall said: “Borrowers may be concerned to see the average purchase APR surpass 30%, but it’s worth noting there remains a plentiful number of 0% introductory credit cards on the market.

“However, over the past few months, the interest-free terms on offer both for purchases and balance transfers have waned, so borrowers now have less time to pay off their debts before interest is charged.”

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

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

Individuals hoping to borrow £3,000 over the next three years face an average rate of 14.3%, compared to 15.9% this time last year.

Those wishing to borrow £5,000 over three years are facing an average rate of 9.5% compared to 6.9% a year earlier.

The average rate on a £7,500 loan tier now stands at 7.4%, compared to 4.4% in October 2021.

And the average annual rate of interest on the £10,000 loan tier sits at 7.3%, versus 4.4% last year.

While borrowing sounds like a simple way to get the presents in this Christmas – 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 cannot afford to pay off a debt you currently have, 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.

But 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.