Credit cards - 'Forever' in debt?

As expected, since the OFT's intervention in the credit card market to reduce default fees, providers have not taken this loss in revenue lying down. Indeed, in the last three months, according to financial data provider, Moneyfacts, 19 card providers have increased interest rates to new customers, some by as much as 12.1% percentage points in the case of Barclaycard, which now charges 27.9% for cash withdrawals.

Next worst is the Co-op which has seen a 6.706 percentage points increase for cash to 11.3% p.a on its Gold Base Rate Visa card. American Express meanwhile has raised the rate for purchases on its Amex Platinum Card by 6 percentage points to 14.9%. And not far behind is Mint - its Gold and Platinum Cards charging 24.942% for cash - a 5.507% percentage points increase.

Lisa Taylor, analyst at Moneyfacts, says that while it may be argued that the 0.25% increase to base rate in August resulted in some of these increases, with rises of up to 12.1% it is clear other forces are at play.

Taylor notes that rising bad debts and the lost fee revenue has left many providers with no choice but to look for alternative avenues for income. And it seems, raising interest rates is a popular option. For many consumers this rise may go unnoticed but should they take the time to look at the long term consequences, they could be in for a nasty surprise.

Take, for example, a customer owing £1K on their credit card. At a rate of 8.9%, paying the minimum balance of 2.5% min £5, the debt would be repaid in 11 years and 4 months, incurring total interest of £342.46. But should this rate rise 6% percentage to 14.9%, the same debt would take 14 years and 3 months to repay, stacking up £731.69 in interest. "So a 6% interest rise more than doubles the interest payable and extends the term of repayment by a whopping 2 years 11 months," says Taylor.

"Withdrawing cash from your credit card can be an expensive way to replenish your wallet, as you're not just paying a high interest rate but also a withdrawal fee. With many people's finances on a knife-edge, it may be that more and more people are relying on credit card cash withdrawals to make ends meet.

If you are able to make payments, even slightly above the minimum required, you may be surprised at the effect this has on your outstanding debt. For example, if you increase your monthly payments from 2% to 3% it would save you £570.68 in interest and knock over eight years off your repayment term. And if you increased your monthly payments from 2% to 5% you'd end up knocking a whopping 12 years and 10 months off your debt and saving £847.38 in the process.

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2006-09-26 12:33:38 © Moneyextra.com