Lorna Bourke: Credit card charges on the rise

It’s not just the cost of your mortgage which is going up.

Anyone who owes money on a credit card will find that the cost of borrowing is more expensive, while getting a 0% balance transfer deal is increasingly difficult. In spite of three 0.25% cuts in Bank Base Rate since November of last year, bringing interest rates down to 5%, credit card charges have risen. 

According to price comparison website MoneyExpert the average standard APR on credit card purchases has increased by 0.56% in the past six months, from 16.56% to 17.12%. MoneyExpert warns that credit card lenders are getting tough in the wake of the credit crunch and charges for transferring balances now typically stand at around 3% of the amount transferred.

It has calculated that credit card companies have already clawed back some £3.1 billion worth of credit by cutting the spending limits of their customers.

‘Everyone is finding it more difficult to make ends meet as the cost of living rises,’ commented Sean Gardner of MoneyExpert. ‘Most of us would normally seek out a new zero per cent deal to tide us over the bad times, but with lenders playing a cautious game getting one of those cards is more difficult than it used to be. You'll need to convince the card company that you can afford to repay your debts.’

‘This means more of us will have to use our current credit card and if the zero per cent deal has expired you'll be borrowing money at a rate of around 16%. So be careful what you spend on the plastic because the interest will soon mount up. A balance of £3,500 on a credit card with a standard APR of 15.95% would incur an annual interest charge of some £558,’ Gardner warns.

And many borrowers are not making the most of 0% balance transfer deals because they don’t understand how the lender applies the monthly payments to the outstanding debt.

If you transfer a balance to a new card, but spend money on the new card, the lender will usually apply any monthly repayments that you make to reduce the cheapest debt first – that is the 0% transferred balance. 

You will be charged an average of 15.95% on the new spending on the card, up from 15.2% six months ago according to MoneyExpert. The only way to get maximum benefit from a balance transfer is to not use the card for purchases once you have made the transfer. Many cardholders don’t understand this.

Nationwide is calling on all the banks to highlight order of payments now and not wait another six months when all credit card providers will be obliged to include on statements details of the order of payments they use. 

It accuses the banks of misleading customers, and estimates that consumers will have paid up to £500 million in interest payments in the 12 months since it was announced that providers will have to highlight the order of payments they use. The new regulations take effect in October of this year. 

‘As people try to spring clean their finances and look to credit cards with 0% balance transfer deals to help manage their debt, many will find that, if they make a purchase, they won't be able to clear the cost of the purchase until the balance transfer has been paid off in full,’ warned Jeremy Wood, divisional director at Nationwide, ‘This practice is not well understood by consumers and is not in their interests.’