Is it time to switch your credit card?

If you currently hold a balance on a credit card, there is a chance that the rate of interest you pay, could soon be on the way up – credit card interest rates are variable after all.

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Virgin Money for example, has just written to some of its customers to inform them of impending rate rises that could see interest on purchases rise from a representative APR of 16.8% up to 24.9%, while interest on balances transferred to the card could rise from 18.9% to a whopping 27.9% (again, all rates are variable).

But did you know that you have the right reject any rate hike, provided you stop borrowing from that lender? Here we explain what you can do if you have been ‘rate-jacked’.

The rise of credit card interest rates

Last year saw the average rate representative APR (which stands for Annual Percentage Rate) on credit cards rise to 19.1%, their highest level in 13 years, with Bank of Scotland levying the largest rate rises of 2% on its All in One MasterCard, including its Halifax branded cards.

And although the Bank of England says that the average APR on credit cards has now fallen to 17.32%, it could be set to soar again in this fresh round of price hikes.

Virgin, that actually offers cards funded by credit card giant MBNA, could be the first of many card providers to change the goal posts on interest rates. However, the bank is keen to point out that – just like the rates on credit cards – borrowers’ risk levels also variable, and sometimes need to be aligned. It also points out that the rate rises will only affect around 1% of its customers.

You might not know it but, in fact, all credit card providers consistently monitor the creditworthiness of its customers and adjust both credit limits and interest rates accordingly.

This means that if your credit score has fallen your lender may see you as more of a credit risk and increase the interest rate and/or decrease the credit limit on your card to match.

Also, as credit card interest rates are variable, lenders are well within their rights to raise interest rates periodically, even if there is no rise in the underlying base rate.

Another consideration is that advertised APRs are representative.  This means the rate only has to be offered to 51% of successful applicants, so 49% could be offered a higher rate than they were expecting.

So what exactly can you do if you are unhappy with a rate increase?

Contact your credit card provider

It could be a bit of a long shot but the first thing you should do is call your credit card provider and ask it not to increase your rate.

If this doesn’t work then you can actually reject the rate rise based on the new pricing by paying off the balance at the old rate.

However, doing this means that, not only will you need to have the ready cash available, you will no longer have access to this line of credit. This may not be an option for those who don’t have any other credit options, such as borrowers with a poor credit score. And it is those with a poor credit score that are most likely to be given the higher rate.

Transfer the balance

If you are eligible for further credit then it’s bound to be worthwhile transferring your balance to another credit card which either offers 0% on balance transfers or one that has a standard low rate.

The market-leading 0% balance transfer deal is Barclaycard’s Platinum credit card with Extended Transfer, which offers 22 months interest-free on balances for a 2.9% balance transfer fee.

With this or any other 0% balance transfer credit card, make sure you pay the balance off in full by the end of the interest-free period as interest rates then rise to anything upwards of around 16% and you are back where you started.

On the other hand, a credit card that offers a low interest rate as standard could prove to be a better option. Sainsbury’s Low Rate credit card has a representative APR of 6.9% (variable) while the Barclaycard Platinum Simplicity offers a representative 7.9% (variable). Neither charges a balance transfer fee either.

If you are transferring a balance to another card then you need to work out whether a 0% interest rate or low standard rate card would best suit your needs.

Struggling with debt?

If you are struggling to repay your debts then it is vital that you address the problem immediately and get help.

You can get free, independent advice from debt charities such as Credit Action, the Consumer Credit Counselling Service or National Debtline all of which have information on their websites and Freephone numbers so you can speak directly to an advisor.

It is imperative that you acknowledge your problems and do something about them as soon as possible as ignoring them will only make the debt increase through interest and penalty fees, which will make matters even worse.

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. We’re free, independent and compare all UK credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Ltd 2011.

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