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Your Money > Credit Cards Articles > Credit cards - get ready to pay more
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By Sarah Modlock
A lot has been happening with credit cards lately, which is understandable during these crunchy times. This week I am taking a look at the latest news and pitfalls in the markets. Are you sitting comfortably? Charges up We start with a look back to 2006 when the Office of Fair Trading (OFT) asked credit card issuers to cap their charges for late payments at £12 or less. Previously, these charges had been closer to £25 a time, which the OFT said was unfair. But in the wake of the clampdown, card companies have clawed the lost cash back from customers by putting up their interest rates. Two years on and independent listings site Moneyfacts finds that the average purchase interest rate has risen from 14.9% to 16.4%. This means that while a relatively small number of customers were getting hammered with the late payment fees, now nearly all customers will being paying more if they carry any balance on their credit card. So if you have a balance of £5,000 repaying just 2.5% per month will end up paying an additional £755 in interest from the 1.5% increase in purchase rates. "The average interest rate for cash transactions have seen a marked increase from 18.1% to 24.3%," says Moneyfacts' Michelle Slade."On top of this the majority of institutions have increased their cash advance charges. Previously the majority of institutions charged 2%, min £2: now the majority charge 3%, min £3. Taking cash out on credit cards has always been an expensive way of borrowing, particularly as interest is charged from day one, but with the 6.2% increase in the average rate customers who are relying on cash advances to balance their monthly budget it will make a bad situation even worse." There is some good news in that the number and length of introductory deals has increased. In April 2006 there were 58 cards offering 0% introductory purchase deals of up to 10 months. Today there are 85 cards with deals of up to 12 months. Previously the cards offered between up to 12 months now they offer up to 15 months. However, many institutions are tightening lending criteria so only those with perfect credit histories will be able to take advantage of these longer deals, and even then the interest free limits will be much smaller than they would have been granted previously. "Although rates and charges on credit cards have increased, there are still good deals to be found for those with a good credit history. Shop around and find a card that best suits your needs, whether it's a balance transfer deal if you have an existing debt on a card, or a card with an incentive such as cashback if you pay your balance off in full, Slade advises." Computer says 'no' The news about Egg closing credit card accounts for some of its customers made big headlines. But millions more people have been quietly turned down for credit recently. Card companies have refused applications from more than 3.24 million people in the past six months as they continue to turn the screws on risky lending says new research from comparison site MoneyExpert. If you are currently applying for credit and having no luck then start by getting hold of your credit report from each of the three credit reference agencies - Experian, Equifax and CallCredit. It will help you spot black marks and gaps which may explain the problem. If you are not on the electoral roll then this is likely to ensure an automatic 'no' from almost all lenders and card issuers. If your credit record is healthy, it could just be that the companies are adopting a tougher approach or limiting the cards they issue. Pick and choose cards carefully and make sure you don't apply for dozens of cards as the footprints each application will create on your credit file could be damaging in the future. Young adults are most likely to have a credit card application refused - the research showed that 10 per cent of people aged between 25 and 34 were turned down in the last six months, more than any other age group. Those approaching retirement are by contrast considered the lowest risk by credit card companies, with only three per cent of people aged between 55 and 64 having been rejected in the same period. The other trend at the moment is to slash credit limits. MoneyExpert says that card companies have clawed back some £3.1 billion worth of credit from 1.8 million customers this way in just six months, with the average reduction around £1,600. Young borrowers are most at risk of having their limit reduced, with some six per cent of 25-34 year olds - around 568,600 people - saying their provider has reduced their spending allowance. I have to say I don't think this is a bad thing. After a couple of years of ridiculously big (and for many, unaffordable) credit limits, this should help bring borrowing down. What are you paying for? I have often reminded credit card users about the loophole with 0% balance transfers where card issuers use your repayments to reduce the cheapest part of your debt first (the balance you have moved) leaving your expensive purchase balance to clock up interest. Many people are unaware of this and wonder why they don't seem to be making much progress with their card debts. The good news is that come October, the card companies will no longer be able to hide behind the smoke and mirrors on this one and will be required to to include on statements details of the order of payments they use. Now Nationwide Building Society, which has been campaigning on this issue, is urging other card companies to act now and tell their customers clearly how they allocate their repayments, rather than be forced by regulation in six months time. It estimates that consumers will have paid up to £500 million in interest payments, in the 12 months since it was announced that providers will have to highlight the order of payments they use. So don't wait until October to get a better deal. Check your existing card now and switch to save money. You may find it makes more sense to pay off your balance steadily and use a separate card with a much cheaper rate of interest for purchases. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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