OFT credit card default charges – two years on
In April 2006 the Office of Fair Trading (OFT) declared that default charges on credit cards were too high and suggested capping these at £12. In the months that followed lenders cut these charges to £12 but in an attempt to recoup lost revenue, they hiked rates and charges elsewhere. Two years on, how much have the rates and charges on credit cards increased?
Michelle Slade, analyst at Moneyfacts.co.uk, comments:
“In April 2006 the average purchase rate on a credit card was 14.9%; today this has jumped to 16.4%. Previously whereas only a select number of customers were being penalised, now all borrowers are paying the price.
“For any customer who paying their bill in full each month, the rate increase will have no impact, but with many households struggling with increasing financial pressures, those who only repay the minimum will be hardest hit. Anyone with a balance of £5,000 repaying just 2.5% per month will end up paying an additional £755 in interest from the 1.5% increase in purchase rates.
“The average interest rate for cash transactions have seen a marked increase from 18.1% to 24.3%. On top of this the majority of institutions have increased their cash advance charges. Previously the majority of institutions charged 2%, min £2: now the majority charge 3%, min £3. Taking cash out on credit cards has always been an expensive way of borrowing, particularly as interest is charged from day one, but with the 6.2% increase in the average rate customers who are relying on cash advances to balance their monthly budget it will make a bad situation even worse.
“There is some good news in that the number and length of introductory deals has increased. In April 2006 there were 58 cards offering 0% introductory purchase deals of up to 10 months. Today there are 85 cards with deals of up to 12 months. There is also an increase in the number of cards offering 0% balance transfer deals, from 82 in April 2006 to 99 today. Previously the cards offered between up to 12 months now they offer up to 15 months.
“The market for balance transfers in the last two years has been very competitive with many institutions increasing the length of their deal. However, many institutions are tightening lending criteria so only those with perfect credit histories will be able to take advantage of these longer deals, and even then the interest free limits will be much smaller than they would have been granted previously.
“Although rates and charges on credit cards have increased, there are still good deals to be found for those with a good credit history. Shop around and find a card that best suits your needs, whether it’s a balance transfer deal if you have an existing debt on a card, or a card with an incentive such as cashback if you pay your balance off in full.”Moneyfacts Group
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