The Credit Punch: Credit card interest rates soar to new high

January 19, 2022

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3 min read

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What's going on here?

The Bank of England revealed that credit card interest rates have reached an all time high on 30 November 2021.

What does this mean?

Credit card interest rates have soared to their highest levels in more than two decades. Credit card interest rates are defined as the percentage charged on the total amount you borrow. Therefore, this means users will have to pay back a larger sum than initially borrowed when paying for items via their credit cards. Joe Cox, a senior advisor at the Jubilee Debt Campaign, has described the increased rates as “exorbitant”. Indeed, such high levels of interest seem unjustified given the Bank of England’s (BoE) exceedingly low 0.1% interest rate. Such drastic contrasts have sparked outrage amongst credit card users who believe credit card companies are using their bargaining power to increase profits.

This concern was voiced by Michael Donald – the former director of Visa UK – who said “If the Bank of England base rate is the lowest ever, how can you have a credit product which drives people further into indebtedness with the rates continually going up?”. Moreover, debt is likely to continue growing as households struggle to combat the financial strain of COVID-19; a task that is made all the more impossible with high levels of credit card interest.

What's the big picture effect?

Increased interest rates are likely to have a disproportionate impact on poorer households. This is mainly due to spending patterns and consumer habits. For instance, less affluent households used credit cards throughout the pandemic as a medium to survive and cover living expenses. This is in contrast to wealthier households whose credit card use decreased during the pandemic as multiple lockdowns restricted spending on travel and leisure. Increased reliance on credit cards has undeniably increased the amount of household debt, with recent BoE reports showing £57bn consumer debt – equating to approximately £2,080 per household. Such high levels of debt have placed strain on debt charities such as Citizens Advice who are now experiencing more demand than ever before.

With this said, credit cards are extremely commercially valuable and have contributed to a flow of easy credit which has been fundamental to unlocking the UK economy in recent decades. However, the now astronomical levels of interest may call into question their commercial viability. Campaigners like Cox have proposed the implementation of new financial regulation which would serve to protect vulnerable households from inequitable levels of interest. This financial regulation would mirror the rules imposed on payday lenders in 2014 which prevented companies from charging more in interest than the amount borrowed. Whilst such regulation does have its benefits, there is also a darkside of financial red tape which must be evaluated. The UK is arguably the centre of global finance, in part caused by its innovation and regulatory context. In this way, changing the UK’s legal framework for finance may dissuade potential foreign investment. This may have a drastic impact on UK GDP and financial growth, an impact that may look particularly bleak given the harsh impact of the pandemic and Boris Johnson’s desire to “build back better”.  

On the whole, credit card interest rates have risen to 23%, their highest in two decades. This in part reflects the increased use of credit cards during the pandemic as households used these payment methods to stay financially afloat. Nonetheless, it is easy to see how such high levels of interest are unfair on consumers which has prompted consideration of new regulation. Will the legislature swing into action to protect consumers, or will the UK retain its current financial framework under the pretext of capitalism and free trade?

Report written by Luke Cuthbert

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