What with all that holiday spending, many people’s credit cards see a lot of action during the summer months. So it’ll come as a shock to many that the interest rates they’re having to pay look set to rise.
MBNA, for example, which issues credit cards for numerous banks and financial firms, is cropping up repeatedly on internet forums as disgruntled customers report that it has suddenly upped its interest rates. The group is “whacking up the interest rates paid by some of its customers to a punishing 34.9%,” reports The Guardian. And to make it worse, these rate rises are hitting many customers just as their promotional interest rate offers come to an end.
Don’t assume this doesn’t affect you – seven million Brits have MBNA credit cards and I’m betting at least half of them don’t know it. That Abbey credit card sitting in your handbag or wallet is actually issued by MBNA, as are the holy grail of credit cards the Virgin plastic – they’ve consistently offered the best deals for years now, but they are becoming very picky about who can have one.
And even if you don’t have an MBNA card, many other credit card providers are also upping their rates – in fact, Moneyfacts reckons that a third of credit card holders have seen rates rise in the past year. And even if you haven’t, with lenders tightening up all the time, it’s likely to be only a matter of time before you do. So what can you do about it?
The first thing to do is to work out if you can simply clear your debt. You are never going to find a savings account offering you more interest than you are paying out on your debt, unless you have a 0% interest deal – and even then you should be trying to pay off the debt before the deal expires. So forget building up savings until you’ve cleared that debt.
Why your monthly interest rate is misleading
If you can’t simply clear it off, then the next thing to do is tackle those interest charges. Start off by finding out what your current Annual Percentage Rate (APR) is. Many credit card providers don’t put it on your statements, preferring to show you the much smaller-looking monthly interest rate. But that monthly rate is misleading. For example, being told you will be paying 2.5% interest every month might not seem too bad until you work out that it amounts to a stonking 34.95% a year. If your APR is changed, then your credit card provider should send you a letter informing you, but if you are unclear of what your current rate is then ask them.
Once you know your rate, you can start shopping around to see if you can get a better deal. Moneyfacts.co.uk has a list of the best credit card deals. Just be aware that you will have to pay a balance transfer fee if you switch credit cards – and it can’t just be added to your debt. The best balance transfer rates at the moment are around 3% of your debt.
Try to get a credit card with a 0% introductory rate and aim to pay off as much as you can before that rate runs out. And when it does, shop around again and try to switch to another 0% introductory rate – always remember that in the financial world, loyalty rarely pays. That way you can focus on clearing your debt rather than lining the bank’s pockets.
The golden rule here is not to see an introductory rate as a payment holiday. Credit card debt is one of the most expensive forms of debt you can have, so it is worth paying it off as fast as you can.
How to set up a debt repayment plan in your lunch hour
But when you have a big debt, paying it off can seem a mammoth task – those of us with unsecured debt (including personal loans as well as credit cards) have an average debt of nearly £22,000 according to Credit Action. But it’s not hard to start clearing it – you can set up a repayment plan in your lunch hour.
First work out how much you can afford to pay off each month. Ideally, you will pay off more than the minimum payment each month, as these are usually so paltry you’ll barely be covering the interest. For example, as Neil Faulkner points out on Fool.co.uk, if you have a debt of £10,000 on a credit card that charges 16% APR and the minimum payment is 2% in the first month, you will owe £200. If you pay that in the first month, £67.33 will go to your debt – the other £133.33 clears that month’s interest charge.
But don’t despair if you can only afford the minimum payment in the first month. If you pay that £200, then the following month, your minimum payment would be slightly lower, at £198.67. Rather than setting up a direct debit to pay off the minimum each month, simply stick to the original minimum payment. After all, if you can afford to pay off £200 that first month, you can afford to pay off £200 the next month and so on, says Faulkner. This way you will be paying off a larger and larger amount of your debt each month.
Remember – the same rising interest rates that are squeezing those in debt are great news for savers. So pay off your loans and start taking advantage of decent rates while they last.