Steve Willey, Head of Cards
As fuel, food and energy prices soar, so too are credit card debts. According to the UK payments association Apacs, collectively we now owe £54.6billion on credit cards suggesting we're leaning more heavily on plastic to prop up an increasingly steep mountain of debt and there are worrying signs that the strain is getting too great for many to bear.
It is not only borrowers that are affected - the credit card industry is also grappling with the knock-on affect of customers' over-indebtedness. It is estimated that more than 20% of the money owed on British credit cards is unlikely to be paid back, which is three times higher than during the housing crisis of the 1990s.
With bad debt levels rising and more people struggling to meet minimum repayments, lenders are looking to other customers to claw back some of that money by increasing the amount of interest they charge them.
How lenders are making life difficult for borrowers
With lenders now more cautious about who they will offer credit to, many borrowers who have been used to churning their debt and moving from one credit card to another to take advantage of low-rate introductory offers, are now finding the doors to new credit are either firmly shut, or they have to pay more for the borrowing facility.
As well as hiking the cost for new borrowers, many lenders are also putting up interest rates for existing customers. Egg, Capital One, Lloyds TSB, MBNA and Barclaycard have all increased their rates to a significant portion of their customers and according to some of our forum members, other firms to have increased interest rates for existing customers include American Express, Virgin Money (whose credit cards are provided by MBNA), and Norwich & Peterborough building society.
Some customers have also had their credit limits slashed. This tightening of criteria is making life even harder for those that have borrowed heavily. The risk is that higher rates and lower credit limits, coupled with rising living costs, will push those who were only just managing to service their debts over the edge. This will result in even more people missing credit card and loan repayments and higher levels of bad debts for lenders.
What options are available to borrowers?
The severity of debt problems varies hugely. If you owe money on credit cards but can still afford your monthly repayments, then focus on clearing your balances as quickly as possible.
Although lenders are tightening up on who they will lend to, if you have an unblemished credit history you should still qualify for a new deal, so see if you can move to a card with a lower rate of interest.
There are still interest-free deals available to those with excellent credit scores. The top deal is the Capital One Balance Transfer Card, which offers 0% until November 1, 2009 at which point it reverts to a typical rate of 15.9%. This deal includes a balance transfer fee of 3%. The Virgin Credit Card and Barclaycard Platinum As Seen on TV cards are also highly competitive, the former offering a 0% rate for 15 months with a typical rate of 15.9% and a 2.98% balance transfer fee; while the latter offers 0% for 14 months but with a lower balance transfer fee of 2.9% and a lower typical rate at 14.9%.
If you want a low rate without a fee, you could opt for the Capital One Low Rate at 8.5% with no balance transfer fee.
If you want a card you can spend on as well as transfer a balance onto, go for a card that offers 0% on balance transfers and purchases for an identical period to avoid falling into a negative payment trap - as outlined in 'The interest-free credit cards that may charge you interest'. In this category, the Capital One Platinum is the market leader with 0% on balance transfers and purchases until October 1, 2009, with a typical rate of 12.9% and a 3% balance transfer fee. Also worth considering is the Halifax One Online Special with 0% on purchases and balance transfers for 10 months, a typical rate of 15.9% and a 3% balance transfer fee.
What if your credit history is less than perfect?
Unfortunately, the market-leading deals are only available to customers with good credit ratings. If you have a less than stellar rating, the last thing you need is a further rejection as this will only further decrease your chances of getting credit in the future - so apply carefully.
The easiest way to do this is by using our Smart Search facility, which makes an assessment of your credit score and returns results with credit cards you're likely to qualify for.
Alternatives to credit cards
For some, paying off credit cards is a neverending battle because they can't resist the temptation to carry on using the card for spending as well. If this is you and you find that your balances are not declining, consider taking out a loan to clear all your card debts. You should then close you credit card accounts to avoid racking up more debt.
Unfortunately, as with credit card rates, loan rates are also rising and the market-leading secured loan from First Plus at 6.6%, which is available only through moneysupermarket.com, will be removed from the market on August 9. Remember, if you fail to keep up repayments on a secured loan, a lender has the right to demand the money back from equity in your home.
If you're not a homeowner, another option is an unsecured loan. The market-leading rate is offered by yourpersonalloan.co.uk at 7.3%. For more loan rates, check out our loans section.
What should you do if you are already struggling to meet your monthly payments?
If your debts are extreme and you have over-borrowed and feel there is no way you will be able to repay what you owe, don't panic. You're not alone.
The first thing to do is contact your existing creditors and see if they might be willing to freeze your interest or accept lower monthly payments. If you don't feel confident to do this yourself, National Debtline, Citizens Advice Bureau and Consumer Credit Counselling Service all offer free advice. Alternatively, you could take out a debt management plan through a debt solutions company such as Debt Matters, Think Money or Baines & Ernst - they will negotiate with lenders on your behalf and administer payments, albeit for a fee in the region of 15% of your monthly repayment.
Another option is an individual voluntary arrangement (IVA) but this requires specialist advice and should not be entered into lightly. An IVA is a legal agreement between you and your creditors with a repayment programme based on what you can realistically afford to repay.
Before you enter into an IVA or debt management plan, visit our debt channel. You may also find the recent interview our site editor, Clare Francis, conducted with James Dean from Debt Matters includes some helpful information.
Have your say: Are you being affected by the clampdown on credit? If so, visit our forum as our members may be able to offer some useful advice.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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