No Rise In Credit Card Interest Rates to Claw Back Lost Revenue

A rise in credit card interest rates has failed to materialise despite consumer fears that credit card customers would have to pay for lost revenue from lower penalty charges though higher interest rates.

It was widely expected that credit card issuers would raise their annual percentage rate (APR) for cash advances and purchases in order to offset the losses suffered as a result of the OFT’s ruling that penalty charges, for either late payments or exceeded credit limits, were excessive and should be reduced from £20 to £12.

Although most UK credit card issuers have so far resisted the temptation to raise interest rates a few have raised them slightly, with the average APR on purchases rising from 15.2% to 15.7%. The average APR on credit card cash advances has seen a bigger rise, jumping from 18.07% to 19.02%.

The OFT set a deadline of September 1 for UK credit card companies to adhere to it’s ruling on credit card charges. Most credit card issuers have so far reacted accordingly to the OFT’s ruling, although estimates put lost revenue at £100m.

Andrew Hagger at online financial data firm Moneyfacts.co.uk, said: “ It would appear that rises have come from a small band of lenders rather than across the whole industry, and it seem that the less obvious cash advances have been exploited more than purchases APR’s.”

Some of the most well-known credit card brands are amongst the worst offenders for dramatic APR increases. Card issuers such as Capital One and American Express have both raised rates by 5%. For Capital One customers, this means they now a staggering rate of 34.9%

Other credit card issuers to raise rates significantly are Lloyds, HSBC and Nationwide. As competition is extremely fierce for custom in the UK credit card market, raising APR’s may be an act of folly as customers seek better deals elsewhere.

Moneyfacts’ Andrew Hagger believes that the main reason that the majority of card firms have so far been able to resist raising APR’s to claw back lost revenue from charge reductions, is that they have targeted other revenue streams from which they can offset their losses. For example, some credit cards have abolished caps on balance transfer fees, whilst some have just raised the balance transfer fee.

Transferring a £5,000 balance to a Halifax credit card would cost a borrower £150 because the bank has an uncapped 3% charge.

Mr Hagar added: “Borrowers have got to keep their wits about them when looking to do anything with their card, be it making purchases or switching a balance.”

Richard Smith
28th August 2006

 

More Information:

• Quick Balance Transfer Guide
  Balance transfers allow card holders to transfer the money they owe to their existing credit card to another, usually at a special rate of interest. The new credit card company pays off the old credit card debt and transfers it to the new card. This article will tell you how to play the game.
• The True Cost of Balance Transfers
  Balance transfers are a great way to consolidate credit card debts into one place, especially when there are many 0% deals available. However, there are hidden costs.

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