Campaigners are calling for new legal caps on “exorbitant” credit card interest rates, which have hit their highest levels for more than two decades.
Bank of England figures reveal the average annual interest rates offered on credit cards has risen to 21.49%, compared with the base rate of just 0.1%. It is the highest average credit card rate since December 1998.
Michael Donald, a former director of Visa UK and founder of the UK digital payment app ImageNPay, said it was hard for the financial industry to justify interest rates of above 20% when the base rate is at a historic low. He said: “If the Bank of England base rate is the lowest ever, how can you have a credit product which drives people further into indebtedness with the rates continually going up?”
He said consumers should be examining whether they need to have any debt on a credit card when personal loans can be obtained with annual interest rates as low as 2.8%. The various payment options now available to consumers raised the question of whether it was 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 the credit card interest rate is also linked to the risk of consumers defaulting on payments.
Consumers in the UK owe about £57.9bn on their credit cards, equivalent to about £2,080 per household, according to Bank of England data. The most recent figures from UK Finance, the financial industry trade association, show there were 334 million credit card transactions in August with a total spend of nearly £17bn.
Victoria Sully, 36, from Newquay, Cornwall, who runs the Lylia Rose lifestyle blog, racked up £17,500 in credit card and store card debt in just two years after starting her theology degree at the University of Gloucestershire.
She said: “I just got to the point where I couldn’t even make the minimum payments. I felt I was never going to get out of it and was going to have to go bankrupt. I felt really low and I didn’t really see a way out. It’s very easy to get quite addicted to spending and putting it on a credit card. It doesn’t feel like spending. We are tempted all the time because there are adverts everywhere.”
Sully sought help from Citizens Advice and a debt management firm, which helped her with a repayment plan. She paid off her debts within five years and now provides online advice on managing finances.
Lockdown offered a chance to save money for more affluent households, and about £14bn of credit card debt in the UK has been paid off since February last year.
Charities, however, warn that some of the poorest households have resorted to credit cards to help pay for their living costs. Research published in October by the Joseph Rowntree Foundation found 4.4 million low-income households have had to take on new or increased borrowing through 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, a senior policy adviser at the Jubilee Debt Campaign, a charity that campaigns against unjust debt, said: “We are in the grip of a household credit crisis and it’s concentrated on those on lower incomes whose position is worse than it was before the pandemic. They are being charged exorbitant rates.”
Cox said the government should now impose the same financial restrictions on the credit card firms as on the providers of payday loans. The Financial Conduct Authority (FCA) imposed new rules on payday lenders in 2014 under which they could never charge more in fees and interest than the amount borrowed.
The Bank of England credit card lending data is a monthly weighted average interest rate based on the advertised APRs of the credit card lenders. The high credit card rates are also reflected in APR data published by Moneyfacts, the financial data firm, which recorded a rate of 26.4% in October, the highest rate since it started recording the figures in 2006. It also includes annual fees and other charges in its rates.
UK Finance said: “Credit cards can be a useful way for people to manage their finances and spread the costs of large purchases. Pricing decisions are a matter for individual card providers, but base rate is only one of a number of factors which impacts the cost of most credit cards.”
An FCA spokesperson said: “Our rules are helping tackle problem credit card debt. Credit card companies must help borrowers who have been in persistent debt for 36 months to repay their debt more quickly.”