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By Reno Charlton
News Editor, 22 April 2008
IT seems that the OFT's attempt to reduce the unfair cost of credit cards may have back-fired after recent reports suggest that capped default charges may be a cause of increased rates.
Most of us are aware of how high the interest rate on many credit cards can be, however over the last 2 years the average rate has gone up by around 2%.
There are many assumable reasons for this, and in the current financial climate perhaps the most noticeable one is the banks' need to increase funds and reduce lending risk.
But the credit crunch only hit the UK in the summer of 2007, and the main possible cause hitting the date marks of the beginning of noticeable hiked rates and fees is the OFT’s ruling.
Default charges capped to £12
Two years ago the Office of Fair Trading ruled that penalty fees for fixed and late repayments were to be reduced to a maximum of twelve pounds per fee.
Prior to this ruling credit card firms had been claiming a hefty profit by charging up to twenty or thirty pounds for each late or missed repayment and for exceeding a credit limit.
After the penalty fees were capped credit card companies saw their profits plummet and it became clearly time for these card companies to look at other ways of making up for this lost revenue.
Interest rake hikes for revenue
Recent reports have shown that one of the main ways in which many of these credit card firms may have increased revenue is through hiking up interest rates charged on these cards, with figures showing that over the last two years rates have gone up by a considerable amount despite three base rate cuts over the past four months.
The average credit card rate for purchases has gone up by around 2% since April 2006, with average rates rising from 14.9% to 16.4%.
Who will pay the bill
Previously, default charges - albeit at unfair amounts - meant that people who missed repayments were the ones penalised.
Now, with all interest rates on the increase it will now be anyone who doesn't clear their balance in full each month footing the bill.
Those who aren’t affected will be anyone who keeps their credit card statement repaid in full each month.
What you can do
The credit card market is as competitive as ever and if you've been posted one too many interest rate increase notices from your credit card company now may be the time to start shopping around.
Lyndsey Burton from Credit Card Comparison Online said: "It is vital that people do their research when looking for a credit card and compare different cards to find the most competitive rate of interest. Alternatively, borrowers can opt for deals such as 0% purchase or 0% balance transfer cards to try and save on interest."
There are many credit cards available offering interest rates under the average 16.4% - with some of the lowest deals offering around 12.9% APR.
If you do carry a balance from month to month, your credit card interest rate has been on the increase – and you have a good rating - compare credit cards by their purchase interest rates and switch to a better deal.
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