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Why are credit card rates so high?
The interest rate we pay for our credit cards has now reached a 13-year high. Why are our cards becoming so expensive and what can we do to beat the hikes?
Squeezed Brits are being hit with yet more financial woe as new figures reveal the average credit card interest hit a 13-year high this month.
Research from Moneyfacts.co.uk showed that the average rate offered on plastic has now hit 18.9%, despite the Bank of England base rate standing at a record low of 0.5% for almost two years.
That means borrowers with £5,000 debt on their card will now repay an additional £2,360 over the life of the debt than they would have in February 2006, assuming that they only meet the minimum payment each month.
The news comes as the increased VAT, high inflation and rising unemployment continue to erode our spending power. So what's behind the increase? And what can you do to beat it?
While many of us are worried about rising joblessness, it's also a big concern for credit card providers, which face the risk of more people defaulting on their borrowing when unemployment rises.
These fears are unlikely to recede anytime soon, with job losses expected to continue rising throughout this year. On top of that, new lending restrictions placed on credit card providers could lead to further rate hikes.
Michelle Slade, spokesperson for Moneyfacts.co.uk, cites one example: "Since the beginning of 2011 most card companies have moved to a positive order of repayments. This dent in their revenue stream is likely to mean customers will continue to see rates rise rather than fall."
The graph above shows how credit card rates have soared since 2007
More bad news for borrowers
And while unhappy customers may have once found it easy to register their distaste at rate rises by simply switching to a rival provider, things are no longer quite so simple, as Slade explains.
"Customers who would previously have switched to another provider are now finding it's not so easy to do so," she said.
"Competitive deals for balance transfers and introductory purchases remain on offer, but card providers are selective over exactly who they accept for these deals."
As a result, it's perhaps more important than ever that you take the measures you can to keep your credit profile attractive to potential lenders.
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How to beat the rate hikes
A good way to beat the hikes is to ensure you qualify for the best deals out there - and you can do that by ensuring you maintain an excellent credit rating. Put simply, the better your rating, the more attractive a proposition you are to lenders, and thus the greater the likelihood of getting accepted on the best deals.
For a full range of expert tips, take a look at our guide to improving your credit rating.
And of course, once you've done all that, it pays to scour the market to ensure you're getting the best deal you can for your needs. And don't forget that the best way to ensure you're not paying out more than you have to is by paying your debt off as quickly as you can.
I think it is time for some kind of limit set on the companys.
it is also time for them to limit the ceiling given to worker and non workers they are not worried at all about you the customer they just think about what they can make out of it to pay themselves loads of money. Because i live in Europe and not the uk the credit card is my one way of getting around and paying my bills, yes I am in debt, but!! it is under control. it is cheaper to get your money out with a CC as opposed to your bank card and so that is one way to use it and then pay off the amount by online banking to that amount with a couple of days not interest. and that seems to work.
But there are people out their who have No idea how to work them and the card company's give to just about any body so why should we the customer pay for their stupidity. so maybe it is time for the government to bring in some way of addressing this very Improper use of their power, which must be bordering on grand theft
If my mother needed money I would not charge interest !!!
I only get part of your point. High interest goes with high risk. Credit cards have never been cheap, this is why everyone offers them.
The problem is that over the past few years, too many people have had access to a level of credit that they cannot pay back.
Now part of the blame for this situation can be placed on the banks but the person taking the money has the ultimate responsibility to pay it back.
There are far too many people with credit card debts equal to 100 to 200% of their annual wages/salary.
Credit cards are/were there to supply short term money for purchases, rather than carrying cash.
The idea of using a credit card to pay for holidays and Christmas presents is madness.
Of course banks and stores must share the blame. Stores like Debenhams that used to charge nearly 40% apr, not sure what the current rate is but it will be high.
Banks need to go back to a 5% minimum payment but of course the longer payback time earns them more money, so they are unlikely to do this.
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