Cost of Credit Card Debt Soars

April 2006 saw the Office of Fair Trading take a step to protect consumers in financial difficulty by introducing a series of recommendations that resulted in credit card companies capping the charges they apply to defaulted payments at £12. However, 2 years on and while those that frequently miss payments are better off, credit card users that always pay their bill on time are paying the penalty.

Figures released this week by Moneyfacts.co.uk reveal that while default charges have remained fixed at £12 over the past 24 months, credit card companies have compensated for the associated losses by increasing fees and charges that affect all users.

In the past two years alone the typical purchase rate available on credit cards has risen by 1.5% and now sits at 16.4%, up from the 14.9% average applied in 2006.

Commenting on the impact of this increase Moneyfacts analyst, Michelle Slade explained: "For any customer who pays their bill in full each month, the rate increase will have no impact, but with many households struggling with increasing financial pressures, those who only repay the minimum will be hardest hit. Anyone with a balance of £5,000 repaying just 2.5% per month will end up paying an additional £755 in interest from the 1.5% increase in purchase rates."

The cost of cash-based credit card transactions have also seen a steep hike during this period with typical APRs jumping from 18.1% to 24.3%. While cash advance charges have increased from a typical 2% charge and £2 minimum to an average 3% charge and £3 minimum.

Commenting, Michelle Slade said: "Taking cash out on credit cards has always been an expensive way of borrowing, particularly as interest is charged from day one, but with the 6.2% increase in the average rate customers who are relying on cash advances to balance their monthly budget it will make a bad situation even worse."

However, despite these findings, the news is not all bad as competition in the credit market has led card providers to increase both the availability and duration of balance transfer deals during this time.