Credit card warning as rates hit record high - 'vital' moves to make now (2024)

THE cost of borrowing money on a credit card has hit a record high, new figures reveal.

Interest rates on purchases reached 35.3%, on average, in June this year, according to Moneyfacts.

It's the highest APR (annual percentage rate) since its electronic records began back in June 2006.

The APR indicates the cost of borrowing over a year, including the interest and any fees.

For instance, borrowing £1,000 at the average rate of 35.3% would cost you £1,173.49 in total.

Moneyfacts said that a combination of card withdrawals and interest rate rises have all contributed to this change in its latest unsecured lending trends treasury report, which analyses the cost of credit cards and unsecured personal loans.

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Credit card need-to-knows

Not using a credit card effectively can wreak havoc on your finances and your credit score.

If you don't keep up with repayments or default on your debt, you are likely to get a black mark on your credit record, which could affect your ability to get a credit card, loan or mortgage in thefuture.

It's important not to let yourself get sucked into overspending.

You should always clear the full balance as soon as possible.

If you have a poor credit score, don't bank on being approved for a card or getting the 0% deal you'd hoped for.

Card providers only have to give the advertised rate to 51% of applicants, so you could end up paying more interest than you bargained for.

If you've got a poorcredit record, you're less likely to get the best rates.

And if you are looking for a new credit card, don't apply for lots at once.

After your 0% period is up, lenders can charge upwards of 40% interest, so if you have not repaid the debt fully by then, try to move the debt onto another 0% deal.

PERSONAL LOANS ALSO UP

The cost of personal loans has also increased dramatically this year, according to Moneyfacts.

Individuals looking toborrow£3,000 over three years face an average rate of 17.2%, compared to 16.4% this time last year.

Those wishing toborrow£5,000 over three years are facing an average rate of 11.7% compared to 9.4% a year earlier.

This is its highest point in over 10 years when it stood at 11.7% back in March 2013.

The average rate on a £7,500loantier now stands at 8.6%, compared to 5.2% in June 2022.

And the average annualrate of intereston the £10,000 loan tier sits at 8.6%, versus 5.2% last year.

However, it's worth noting that the average unsecured personal loan rates for £3,000 over three years, £7,500 over five years and £10,000 over five years have fallen during the second quarter of 2024.

Rachel said: "An unsecured personal loan could be ideal for borrowers who want a fixed monthly repayment plan and know exactly when their debts will be repaid.

"However, the cost to borrow £5,000 over three years has risen to its highest level in over a decade. Borrowers will need to decide whether a loan is the right choice versus a more flexible credit card, but they can seek advice if they are unsure."

If you're struggling, getting advice from a debt charity or asking for support from an existing lender is "always wise" to better manage repayments and find out ways to avoid high-interest charges, she added.

While borrowing sounds might sound like a simple way to get out of a tight spot - it's not worth falling intodebtover.

It's vital to ask yourself if you actually need to borrow before committing to a new credit card or personal loan.

If you can't afford to pay off a debt, then you should avoid taking out any more debt at all costs.

We've previously warned thatBrits will find it harder to borrow as rates rise.

And many could be forced to borrow money from the unregulatedbuy now pay later sectoror through riskier and more costly payday loan firms - butwe've warned against this.

How can I reduce borrowing costs?

The first thing borrowers can do is try to improve their credit scores.

Boost your credit score

Getting on the electoral register is a must when it comes to building a decent credit score.

This proves who you are and where you live meaning it's easier to get credit if you're on the list.

It is also wise to check the electoral roll for any errors. You can sign up byregistering to vote.

Don't make too many credit applications as it can be seen as a sign of financial distress - and each application will be recorded on your file.

Use a "soft-search" eligibility calculator to show how likely you are to be accepted.

Always pay your bills as late payments are also recorded in your file.

Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.

The best credit card deals - with the lowest rates, biggest limits, cheapest fees and longest interest-free windows - are reserved for those with top-notch credit scores.

Lighten your loans

If you took out a loan a couple of years ago, it may be worth searching for a better deal.

Using a new loan at a lower rate to pay off an old one can sometimes make sense.

But remember, not everyone gets the rates advertised by lenders, as these are reserved for those with good credit ratings.

Check which loans you’re most likely to get without damaging your score by using an eligibility tool such as the one onCompare The MarketorMoneySavingExpert.com.

Blitz your credit card balance

Do not let credit card debt linger. If you’re just paying the minimum each month, it could take decades to clear.

Only making the average 2.5% minimum monthly payment on a £5,000 balance means it would take you nearly 38 years to pay back and cost nearly £15,000 in total, on a typical interest rate of 22%.

Switch to abalance transfer credit cardto get a window of up to 34 months with no interest charged.

Break the total debt down into monthly payments and set up a direct debit to ensure you wipe the balance in that time. If that’s impossible, try to switch again to a new card.

However, not everyone can get the top balance transfer deals, as they require an excellent credit score.

Find out which cards you’re most likely to get with the eligibility checkers onGo CompareorUswitch.

Obliterate overdraft charges

Dipping into youroverdraftcan be one of the priciest ways to borrow, with some banks charging 40% interest – almost double the average credit card rate.

Move to a bank with a free overdraft.To pay off larger overdraft debts, a money transfer credit card could give you an interest-free respite, but beware of high fees.

How can I get debt help?

If you're in debt there are plenty of services you can take advantage of and they offer free advice on how to manage debt.