The average purchase APR on all credit cards rose to 34.7% APR in February – up from 30.6% 12 months ago.
The rise is worrying considering only 48% of credit card customers pay off their balance in full, according to a survey by comparison website Compare the Market.
Here, Which? reveals how credit card interest rates have changed and and how to tackle a build-up of debt.
How credit card interest has gone up
According to financial data website Moneyfacts, the average purchase annual percentage rate (APR) on all credit cards was 34.7%.
Here’s how the rate has changed over the past two years.
Which type of credit card has seen the biggest changes?
Here we look at how interest rates and promotional periods have changed across different types of credit cards.
Cashback and reward credit cards
Cashback and reward credit cards can help you get more from your everyday spending, but you will normally have to pay back what you owe each month to avoid hefty interest charges.
In February 2023, one of the best cashback cards on the market, the American Express Platinum Everyday Cashback credit card, came with an APR of 28.1%. Now the card has an APR of 31% – an increase of 2.9 percentage points.
In fact, American Express has increased the purchase APR across most of its reward cards in the past 12 months, including British Airways American Express and Nectar credit cards.
Other deals have seen significant increases in interest rates: the Asda Money credit card, which offered 22.9% in February 2023, now charges 25.9%, while the John Lewis Partnership card, which offered 21.9% in February 2023, now charges 27.9%.
Find out moreInterest-free credit cards
These cards won’t charge interest for a set period of time (between three and 21 months currently). However, once this promotional period ends, you'll be charged interest on the remaining balance at the card's standard APR.
In February 2023, you could get an interest-free period for up to 24 months; now the longest-lasting deal is 21 months, offered by Barclaycard. In fact, a year ago, the average interest-free period among the top five cards on the market was 23 months – now it stands at 19.8 months.
In addition to this, the average standard purchase interest rate (which applies after the 0% period) among the top five 0% purchase cards on the market has gone from 23.5% in February 2023 to 24.5% in February 2024 – a one percentage point increase.
Find out more:Balance transfer credit cards
With a 0% balance transfer credit card, you can shift debt from expensive credit and store cards and freeze the interest for a set period.
In February 2023, the longest balance transfer period you could get was 30 months, whereas today it is 28 months.
We have also seen balance transfer fees go up. In February 2023, the average balance transfer fee for cards with the longest interest-free periods was 2.97%. Today that figure is 3.38%.
Once your promotional period ends, you’ll be charged interest on the remaining balance, and interest rates on this type of borrowing have also gone up. The average standard balance transfer APR on cards offering the longest interest-free period in February 2023 was 23.3%; in February 2024, that's now 24.5% – a 1.2 percentage point increase.
Find out moreWhat has caused the jump in rates?
The base rate has been stuck at 5.25% since August 2023. Before this, there had been almost two years of consecutive hikes.
You may assume the Bank of England base rate is only associated with mortgage and savings rates, but it can also impact your credit card interest rate.
This is because the base rate directly affects the cost of lending for providers and it's something they will consider when setting interest rates for credit cards.
Find out more:What are your rights when credit card interest rates rise?
If your provider wants to increase the interest on your deal, it must notify you at least 60 days before the change.
You can reject the new rate, but this is likely to mean you will need to close your account and pay off your remaining balance at the current interest rate.
Find out more:5 ways to tackle credit card interest hikes
If you have credit card debt that is racking up interest, there are some steps you can take.
1. Pay off the most expensive card first
You might find when you look at your credit card debts in the round that one credit card is costing you more than others.
If you have a 0% deal with seven months left and a card charging 24% APR now, it's worth trying to clear the more expensive debt first.
Find out more:2. Pay more than the minimum amount
A simple change you can make is to opt to pay off a fixed amount, rather than just the minimum payment.
According to a survey by Compare the Market, one in five borrowers only made the minimum repayment on their most recent credit card bill.
The minimum payment on a debt is usually charged as a percentage of your remaining debt, which means it reduces as your debt goes down.
For example, a minimum repayment of at least 2% on a debt of £500 is £10, but once your debt gets to £400, your minimum repayment falls to £8.
By having a fixed payment, such as £10 a month, you can ensure you are putting the most you can against the debt and paying it off sooner.
Find out more:3. Use savings to pay down debts
While it's good to have a financial cushion for use in emergencies, there's little logic in having savings if you owe a lot of money on a credit card that's costing you more in interest.
The rates available on the best instant-access savings accounts are significantly lower than the average interest rate on a credit card. So using your savings to pay off your borrowing could save you hundreds of pounds in interest charges.
4. Shift your balance
If you're paying interest on credit card debt, think about switching to a 0% balance transfer deal.
When it comes to choosing a new card, don’t focus solely on the balance transfer period, as you want to shift the debt as cheaply as possible – so you need to take into account the balance transfer fee.
In our analysis, deals offered by NatWest and Royal Bank of Scotland combined a decent 0% period with no extra fees for moving your balance; they were also the cheapest, longest-lasting deals that met our strict criteria.
Find out more:5. Ask your provider for help
If you are struggling with repayments, it's worth contacting your provider to see if they can offer any help.
In 2018, the Financial Conduct Authority (FCA) brought in new rules to help the estimated 3 million people in persistent credit card debt (where a person has spent more on interest and fees than they have repaid on the outstanding debt).
Banks are now obliged to send letters to customers who have been in persistent debt for 18 months, warning them about the cycle they're in.
Credit card providers must offer customers a method of repaying their balance over a reasonable period.
This could be by reducing or waiving interest rates or charges. Just bear in mind that lenders also have the ability to suspend your card to stop you from borrowing.
Find out more:source https://www.which.co.uk/news/article/why-your-credit-card-could-be-costing-you-more-in-2024-aK5vn2l9xNKa