Change of Charge Credit Card

Two years ago it was easy. You wanted a credit card that was interest-free and you got one. Millions of consumers became fully fledged "rate tarts" as they rode the wave of 0% deals that swept the country as interest rates sank to historically low levels.

But now rates are climbing again, with some forecasts putting the Bank of England base rate at 6% by the end of the year, and "free" credit cards look like a thing of the past.

Because while 156 cards currently offer some sort of 0% deal on balance transfers, the small print means there is often an upfront or annual fee, as well as a 1%-3% balance-transfer fee, while complicated interest rate deals that confuse consumers have become standard.

Mike Naylor, personal finance expert at price comparison website uSwitch.com, says headline figures often disguise the true nature of the deal: "Credit card providers offer long 0% balance transfer deals - up to 13 months - coupled with much shorter 0% new purchase deals from three months," he says.

"This is a very easy way for them to ensure consumers incur interest on all purchases made at the end of the three month 0% period for the remainder of the balance transfer deal."

NatWest, Mint and Royal Bank of Scotland have all launched such credit cards this month, says Naylor, and warns that any savings could be wiped out if consumers aren't careful in how they use the card.

"If a balance is transferred and purchases are made as well, the interest charged on these new purchases after the three-month 0% deal expires will wipe out the interest saved on the balance transferred."

He said customers need to get even more savvy in how they use their cards. "It makes much more sense to use two cards - one for balance transfers and one for new purchases," he says.

Hidden fees
As well as the cloudy upfront deals, credit card companies have also been criticised for a lack of transparency when it comes to annual fees.

Traditionally, credit card companies have only charged a fee on "premium" accounts. Customers pay an annual fee to secure other services, like cheaper insurance.

According to the financial website MoneyExpert.com, one in eight credit card companies now have at least one card that charges an annual fee. The highest charge is £275, the lowest £24.

But now the industry has started charging customers who keep a card in their wallet but do not use it.

Lloyds TSB became the first bank to charge a "low use" fee when they introduced the £35 charge for dormant cards earlier this year.

The move made the bank £1,785,945 in its first month, according to uSwitch estimates. The bank also attracted criticism for not revealing who would have to pay the fee.

Sean Gardner, MoneyExpert's chief executive, said the move to charging for cards that sit in peoples wallets "in case of emergencies" was because of "the rising tide of bad debt hitting banks and other credit card firms."

Credit card companies also saw a 43% fall in profits last year. This was mainly because of a 2006 clampdown by the Office of Fair Trading against unfair default charges, which cost the industry £300m.

That plus the rise in bad debt is "forcing providers to tighten their belts and think of new ways to make money," says Mr Gardner. And while Lloyds TSB was the first bank to introduce this, it certainly won't be the last. Morgan Stanley, the Cooperative Bank and Barclaycard have announced plans to introduce no-use fees.

A spokesman for Barclaycard, the industry's biggest card provider, said up to one million customers could be affected by a £10-£20 fee by the end of the year.

The move is an attempt by lenders to rid themselves of customers who cost them money. "Customers who don't use their cards cost us a lot in administration," says Barclaycard. "Those charges are currently paid for by the customers who do use their cards. We're trying to make it fair for everybody."

However, critics of no-use fees say there is ambiguity in how they are applied. "Dormant cards are a problem for the industry," admits Tracey North, a personal finance manager at uSwitch.com. "But we want to see clarity from the industry in how they select people they are going to charge."

Avoiding fees
The best way to avoid fees is to be vigilant, says Ms North. "The key is to read and understand any correspondence - make sure you read it." The second thing is to "close down any old cards. Don't have them hanging about in your wallet."

Mike Naylor echoes this view. "We would not be surprised to see more credit card providers introduce fees, in particular monthly or annual fees, before the end of this year," he says.

"As such, consumers should continue to keep a close eye on the small print and seriously think about switching away from those that do introduce fees for no added benefit."

Credit card interest rates over 13%

Average rate hits 18.9% as card providers worry consumers are increasingly likelt to default on their debt.

Credit card interest rates have hit a 13-year high as providers worry about consumers defaulting on their debt.

The average credit card now charges interest of 18.9%, the highest rate since 1998 and more than percentage points above the trough hit in 2006, according to Moneyfacts.co.uk.

The financial information group said credit card rates had been rising steadily since 2008, as providers priced in the risk that increasing numbers of people were likely to default on their debt in the face of high unemployment.

The increase meant that someone who owed £5,000 on a credit card, and who repaid only the minimum amount each month, would pay an additional £2,360 over the life of their debt, compared with if interest rates had remained at the 14.8% they dropped to in February 2006.

The group added that 18.9% was only the average rate charged to new borrowers, and many existing credit card customers had seen steeper hikes in the interest they had to pay.

Moneyfacts.co.uk said customers who would previously have switched to another provider were finding it more difficult to do so.The rights of consumers borrowing money were strengthened yesterday, as the EU consumer credit directive came into force.

Under the new rules, consumers will have up to 14 days to cancel loan agreements, while they will also be able to make partial early repayments, rather than only being able to clear any outstanding balance in full, as was previously the case.

Lenders will also have to give borrowers standard information before they borrow money, to make it easier for them to shop around, as well as making sure they understand the details of a loan agreement.

Firms will also have to carry out thorough checks on borrowers' creditworthiness before advancing them money.

Consumer minister Ed Davey said: "The implementation of the consumer credit directive will help strengthen a culture of responsible lending.

"With new legal rights for consumers and greater responsibility for lenders, consumers will be better able to take charge of their money."

Credit card rate rise covers lost revenue, says expert

Credit card providers have increased interest rates in an attempt to make up for revenue losses brought on by the OFT's cap on penalty charges and an increase in the number of bad debts, according to a leading financial information provider.

In April, the OFT said that penalty charges imposed when customers defaulted on repayments should be no higher than £12.

Since then, a number of credit card providers have increased their interest rates on purchases, balance transfers and cash withdrawals, said financial database firm Moneyfacts.

Capital One Bank has increased its Classic visa card APR for purchases from 29.9% to 34.94%, and Halifax has increased its APR on balance transfers from 10.5% to 15.9%.

Barclaycard has increased the charge on cash withdrawals using its Simplicity Platinum card from 15.8% to 27.9%, an increase of 12.1%.

Lisa Taylor, an analyst at Moneyfacts, said that even taking into account August's 0.25% interest rate increase, the large rises showed there were "other forces" at play.

"Rising bad debts and the lost fee revenue has left many providers with no choice but to look for alternative avenues for income," she said.

"And it seems raising interest rates is a popular option. For many consumers this rise may go unnoticed, but they should take time to look at the long-term consequences. They could be in for a nasty surprise," she added.

A spokesman at Barclaycard said that while the interest rate for withdrawing cash was 27.9%, the standard purchase rate on its Simplicity Platinum card was the lowest in the market at 6.8%.

He added that the lender also encourages people to repay more each month by lowering the interest rate if they opt to repay a greater proportion of their balance.

"Credit cards are for customers to make purchases using flexible, short-term borrowing. People wanting to access cash could consider using other borrowing options such as an overdraft or personal loan," he said.