Warning over rising credit card and loan costs as interest rates set to rise again this week
BORROWERS are facing a rise in costs, with some loan rates hitting their highest in six years.
It comes just days before the Bank of England is expected to hike the base rate again and for the seventh consecutive time.
Financial specialists at MoneyFacts have released new data on the cost of credit cards and unsecured personal loans in their .
The figures come more than a month after the Bank of England hiked the base rate to 1.75% - the biggest increase seen since 1995.
The central bank has increased the rate to help control rampant inflation which is currently sitting at 9.9%.
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However, the cost of borrowing often rises when the base rate increases, as banks usually pass it on to customers.
In turn, this reduces people's disposable income, which in turn drives down demand, helping to slow any price rises.
But it means people will face higher rates if they need to borrow money.
How has the cost of personal loans increased?
Rachel Springall, finance expert at , said: "In the midst of a cost of living crisis there has been a rise in the cost of borrowing for new applicants on unsecured loans, with some average rates hitting their highest levels in over six years."
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Several providers increased rates and the lowest rate for new customers stands at 3.1% compared to 2.8% in June 2022, she said.
"Lenders would typically keep this tier competitive as it is widely used as a representative APR, but we could see further rises to come if the potential risk for borrowers to default is elevated and lenders perhaps being more subdued with pricing competitively."
Individuals hoping to borrow £3,000 over the next three years face an average rate of 14.5%, compared to 14.3% this time last year.
Those wishing to borrow £5,000 over three years are facing an average rate of 7.7% compared to 7% a year earlier.
The average rate on a £7,500 loan tier now stands at 5.6%, compared to 4.4% in September 2021, and the highest since January 2016 when it was 5.7%.
And the average annual rate of interest on the £10,000 loan tier sits at 5.5%, versus4.5% last year.
The figures are average and take into account a variety of rates available, so you could still borrow at rates that are lower, or higher, depending on your circumstances.
How have credit card interest rates changed?
Rachel said: "Consumers who need to borrow over the short-term will find interest rates on credit cards rose during the third quarter of 2022."
The average rate across all types of credit card and including fees has hit a new high of 29.6%, she said
"Over the past quarter, the market witnessed a new high purchase card enter the arena from American Express, charging 439.9% APR, and this, coupled with interest rate rises from other providers, pushed the average APR to
The average annual rate of interest for credit cards right now has risen from 26% in September 2021 and 26.6% just last month.
Again the figures are average and take into account a variety of rates available, so you your rate could be higher or lower still.
Rachel also said: "Interest-free terms also fluctuated between June and September and both the 0% introductory terms for purchases and balance transfers fell slightly.
"One area that has worsened for borrowers is balance transfer fees, where the average stands at 1.99%, up from 1.95% in June."
Borrowers should carefully compare these upfront fees and the length of any 0% offer before committing to taking out a new credit card.
How can I reduce borrowing costs?
Rachel said: "As the cost of living rises it is vital consumers keep up with their repayments and switch deals if they are being charged interest if they can.
"It is wise consumers check their credit score before they make any applications for a loan or card and seek advice if they are struggling with their debts."
The first thing borrowers can do is try to improve their credit score.
Boost your credit score
Get on the electoral register is a must when it comes to building a decent credit score.
This proves who you are and where you live meaning it's easier to get credit if you're on the list.
It is also check the electoral role for any errors. You can sign up by .
Don't make too many credit applications as it can be seen as a sign of financial distress - and each application will be recorded on your file.
Use a "soft-search" eligibility calculator to show how likely you are to be accepted.
Always pay your bills as late payments are also recorded in your file.
Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already a large amount of debt.
Lighten your loans
If you took out a loan a couple of years ago, it may be worth searching for a better deal.
Using a new loan on a lower rate to pay off an old one can sometimes make sense.
But remember, not everyone gets the rates advertised by lenders, as these are reserved for those with good credit ratings.
Check which loans you’re most likely to get without damaging your score by using an eligibility tool such as the one on or .
Blitz your credit card balance
Do not let credit card debt linger. If you’re just paying the minimum each month, it could take decades to clear.
Only making the average 2.5% minimum monthly payment on a £5,000 balance means it would take you nearly 38 years to pay back and cost nearly £15,000 in total, on a typical interest rate of 22%.
Switch to a balance transfer credit card to get a window of up to 34 months with no interest charged.
Break the total debt down into monthly payments and set up a direct debit to ensure you wipe the balance in that time. If that’s impossible, try to switch again to a new card.
But not everyone can get the top balance transfer deals, as they require an excellent credit score.
Find out which cards you’re most likely to get with the eligibility checkers on or .
Obliterate overdraft charges
Dipping into your overdraft can be one of the priciest ways to borrow, with some banks charging 40% interest – almost double the average credit card rate.
Move to a bank with a free overdraft. To pay off larger overdraft debts, a money transfer credit card could give you an interest-free respite, but beware of high fees.
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You can get free debt advice
If you're in debt there are plenty of services you can take advantage of and they offer free advice on how to manage debt.
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Most of them can offer you free guidance and help in person, over the telephone or online.
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