In many ways the warnings from PWC's Precious Plastic report came as little surprise: we know that lenders are restricting the availability of credit and that the cost of borrowing is on the up. The
average annual percentage rate (APR) on credit cards here in the UK has risen from
17.06% to
18.22% since January.
The industry is also facing increased regulatory pressures. The government recently launched a consultation into the credit card market and is investigating four key areas: order of payments, minimum repayments, unsolicited credit card cheques, and interest rate increases for existing customers. The government aims to clean up the industry and make things fairer and more transparent for consumers, but card providers warn that it will result in less competitive deals.
So what can we do to prepare ourselves?
Peter Harrison, moneysupermarket.com's credit card expert, said: "The prospect of rising APRs means consumers need to ensure they are doing everything they can to reduce their credit card debts.
"Sustainability and transparency are key to the future of credit card lending in the UK. With the current model looking less and less viable each day, the industry must adapt to survive. The increase in bad debt may see the introduction of annual fees which could bring about greater trust in this form of borrowing and ensure credit card customers are treated fairly. But any such changes must be clear and upfront and result in other 'hidden' charges being abolished as a result. Consumers should be aware that credit cards are likely to become more difficult to come by next year."
Act now
The key therefore is to ensure you have the best credit card for your needs now, as your options to switch and apply for an alternative deal look set to shrink.
I already owe money on a credit card
With Christmas less than six weeks away, the focus at this time of year tends to be on the best credit cards for spending on. But with millions of people carrying a debt on a credit card, balance transfer deals shouldn't be overlooked.
Research carried out by moneysupermarket.com found that 31% of credit card users have debts on their card which they have no intention of paying off in the next six months. But making little or no effort to pay down your balance could prove a costly mistake if APRs do rise as is predicted.
If you have a £2,000 balance on a card with an average rate of 18.22% you'd pay £144.19 interest if you repaid it over six months, but this would rise to £188.79 if you take 12 months to clear your card.
However, if you have an excellent credit score there are a number of great interest free deals to take advantage of, which will give you a breathing space to clear your debt.
Virgin has the longest 0% balance transfer offer at 16 months, with a 2.98% balance transfer fee. NatWest, Royal Bank of Scotland and HSBC are all offering credit cards with 15-month interest-free balance transfer periods, but you have to be a current account customer to qualify. The transfer fees on these products are 2.90%.
For details of more balance transfer offers, visit our credit card channel.
If you have a less-than-perfect credit score you won't qualify for any of the leading balance transfer deals. Your best bet is probably to stick with your current credit card but focus on clearing the debt as quickly as possible to minimise the amount of interest you pay.
I want a card to spend on as well
If you are looking for a card that is good for purchases and balance transfers, then the Sainsbury's Credit Card is worth considering. Felicity King-Evans evaluates this deal in detail in this week's product review but it has a 10-month interest-free period on purchases and balance transfers. You also earn Nectar points when you spend on the card.
Another option is the Halifax All In One Card which has a nine-month interest-free period on balance transfers and purchases. Both Halifax and Sainsbury's charge a 3.0% balance fee for balance transfers.
Again, these deals are reserved for those with the best credit ratings.
What about reward cards?
If you pay off your credit card in full each month - which about 50% of card holders so - the interest rate is irrelevant. However, you may still be able to switch to a better card than the one you currently spend on.
The Sainsbury's Credit Card mentioned above offers an attractive rewards scheme - particularly if you regularly shop at Sainsbury's. You earn two Nectar points for every £1 spent at Sainsbury's and one point for every £5 spent elsewhere. If you're more of a Tesco fan or are a regular Marks & Spencer shopper, they also have credit cards with reward schemes.
However, the most competitive reward card currently available is the American Express Platinum Cashback card: you earn 5% cashback for the first three months, or up to a maximum spend of £2,000. Thereafter you earn 0.5% on the next £3,500 spent on the card; 1.0% on spending between £3,500 and £7,500; and 1.25% on any spending above £7,500. However, as with most reward and cashback cards this deal is only worth considering if you clear your balance each month - otherwise, the interest you'll be charged will outweigh the value of the reward. The standard APR on the American Express card is 19.9%.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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