News & Views - Savantor

Why Credit Card interest is on the rise

Wednesday, 30 June 2010

There have been a few newspaper headlines about credit cards recently in the UK mostly along the lines of banks continuing to rip customers off charging high interest rates on credit card balances when the base rate remains at a mere 0.5%.  This is a fairly frequent occurring cheap shot by journalists looking for an easy headline.  Perhaps they should look at the latest Financial Stability Report, where the Bank of England notes that write-off rates on credit card lending hit a record high of 10.4% in the first quarter of 2010, amounting to £1.25 billion – the second highest quarterly amount on record.  Its statistics show that the average UK credit card rate was 16.51% in April this year, slightly higher than in July 2007 when it was 15.2%.

The Bank warns that a setback to the economic recovery could "aggravate household distress, particularly among borrowers with high unsecured debt repayment gearing".  According to the report, unsecured lending to households accounts for a relatively small proportion of UK banks' loans to domestic customers but since the beginning of 2007 these exposures have accounted for around two thirds (£23 billion) of domestic write-offs by the banks.

In the case of credit card debt, over £4.5 billion has been written off in the past year, amounting to about 10% of all money lent on credit cards, which probably has rather more to do with the current level of interest rates on cards than the base rate.

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