Interest rates on credit cards and overdrafts are soaring as lenders exploit our rising debt levels to boost profits, writes Philip Scott
Banks and building societies are making millions of pounds in extra profits by craftily hiking credit card and overdraft interest rates.
NatWest caused uproar last week when it increased its overdraft rates for the second time since September. The bank’s average overdraft interest rate has risen to 19.41 per cent, up from 17.95 per cent, forcing millions of customers to pay off their Christmas debts at a higher rate.
The rises follow similar increases in September, and mean someone with a £4,000 overdraft would pay almost £60 more a year in interest.
Credit-cards rates have also soared. Co-operative Bank, which portrays itself as a consumer champion, has increased rates on its Gold Base Rate Visa by an incredible 12.9 percentage points over the past 12 months, adding hundreds of pounds to the average customer’s bill.
Banks are also hiking their balance- transfer fees to punish savvy consumers who regularly switch their credit-card balances to cheaper deals.
Consumer groups accuse the banks and credit-card firms of pushing up rates to recoup the £300m they lost in revenue following the introduction of a £12 limit on late-payment charges. The rule was imposed by the Office of Fair Trading (OFT) in April last year.
By finding sneaky ways to increase charges to consumers the banks have not only recouped the cost, but also managed to boost profits. Firms are generating an extra £624m a year from the various ploys, according to research by Uswitch, the online comparison site.
Here we name the worst offenders and suggest the best ways to avoid the banks’ profit-raising tactics.
Overdrafts
For many of us, the overdraft rate is more important than the interest rate paid for being in credit. One in four current-account customers — 3.5m — are permanently overdrawn and 6.2m people regularly use their overdraft facility.
While NatWest has the highest rate at 19.41 per cent, the biggest hike during 2006 came from Royal Bank of Scotland, which added 3.03 percentage points to its Royalties Gold account for overdrafts of less than £1,000, taking it to 15.1 per cent.
Lloyds TSB, meanwhile, has upped charges on no fewer than seven of its accounts twice over the past 12 months.
Customers with the Classic Plus account have suffered the biggest rises over the past year. Rates have increased 2.8 points to 18.3 per cent.
The bank has also removed its £10 overdraft buffer, which means someone who accidentally slipped into the red by just a few pounds could face punitive charges.
HSBC has also let down its customers by lifting rates on its standard current account from 14.8 per cent to 15.9 per cent in June and then again to 16.6 per cent in December.
When confronted, the banks blame the increase in costs on the two quarter-point rises in interest rates from the Bank of England since August.
But critics said overdrafts were not usually linked to interest rates in this way and the banks did not cut rates when Bank rate was falling.
The revolt against overdraft charges is gathering pace, though. Which, the consumer lobbyist, said 120,000 people were preparing to pursue their banks through the courts to claim back the charges, which are believed to fall foul of consumer law.
Banks stand to lose nearly £6 billion if all those who have been penalised reclaim their losses for the past six years.
Although there are no official figures for the number of customers who have successfully reclaimed the charges, banks have backed down in every case before they have reached court.
()
Banks will come under further pressure to cut their fees in the spring, when the OFT will publish the results of a probe into overdraft charges.
In the meantime, if you are often in the red, the best advice is to switch to an account with the lowest rate. Alliance & Leicester’s Premier Direct account offers no interest on authorised overdrafts of up to £2,500 in the first 12 months; the standard overdraft rate is 5.9 per cent.
Susan Hannums of AWD Chase de Vere, an adviser, also recommends the Nationwide Flex Account, which has a low rate of 7.75 per cent. Halifax Moneyback is another good deal, with a rate of 7.9 per cent.
Credit card rates
More than £120 billion is spent on credit cards every year. Most offer an interest-free period — typically 56 days. If you use your card to buy something, and pay off the balance within that time, you pay nothing. But if you do not clear your balance in full, you will be charged interest.
The rates that the card firms levy have risen significantly over the past year.
Card providers increased their rates on purchases by an average of almost two percentage points.
The main offender has been Cooperative Bank, which increased the rate on its Gold Base Rate Visa by 12.9 percentage points to 21.8 per cent.
American Express has upped the rate on its Blue Amex and Platinum Amex cards by six points, to 12.9 per cent and 14.9 per cent respectively.
Halifax has hiked rates on some of its cards by 5.4 points to 15.9 per cent.
It is not only purchase rates that have shot up. The interest rate charged for cash withdrawals has also increased. Egg upped its Visa card rate by six points to 22.9 per cent in September.
Credit card monthly fees are also makinga comeback. Cooperative has introduced a £2 monthly fee on its Platinum Tracker Visa card and it has been reported that MBNA plans to follow suit this year.
Choosing the right credit card to beat these rate rises depends on the length of time you take to repay the debt.
According to Moneysupermarket, a comparison site, if you had a £1,000 balance ona Barclaycard Simplicity card, which charges 6.8 per cent, you would pay £36.30 in interest if the balance was paid off after 12 months. In contrast, by transferring the balance to the HSBC credit card, which has an interest-free period on balance transfers until April 2, 2008, you would pay no interest.
Purchases are also interest-free on the HSBC card, but only for six months; you will be charged a typical rate of 15.9 per cent thereafter. You should therefore avoid spending on the card if you are using it to make a balance transfer because HSBC clears the cheapest debt first. Your monthly payments will be used to repay the transferred balance, leaving you accruing interest on the purchases you have made.
The best 0 per cent card for purchases and balance transfers is the Skycard. It is interest-free until January 1, 2008.
Balance transfers
Credit-card firms are slowly killing off the remaining “rate tarts” — people who switch between interest-free credit cards so they never have to pay off their debt — with higher fees.
Barclaycard started the trend of balance transfer fees in 2004. Today almost all providers charge a fee of up to 3 per cent for switching money from one card to another. Among those that have started charging a fee over the past year are the Post Office and Britannia and Stroud & Swindon building societies. There are only two interest-free deals that don’t charge a fee, from Norwich & Peterborough and Sainsbury’s Bank.
Chauffeur is driven mad by overdraft fees
Steve Banks, 27, banks with Lloyds TSB and is annoyed by the high penalty charges when he occasionally slips into the red.
The self-employed chauffeur from Wolverhampton prefers to dip into his overdraft when he needs extra cash because he does not like using credit cards, which can be more difficult to manage.
But after Lloyds raised its overdraft rates and scrapped its £10 buffer he has been hit by hefty overdraft charges more than once.
He said: "Charging up to £30 for going into the red by a few pounds is excessive. I can’t see any justification for the latest increase in overdraft rates."
Source: Times Online
Please post any news stories about IVAs here:
http://www.iva.co.uk/forum/default.asp?CAT_ID=5
See my Blog:
http://ivanews.blogs.iva.co.uk
