25 November 2016
Interest rates on credit cards are going to rocket
A couple of weeks ago, I received a letter from Lloyds telling me that they'll now be linking my credit card interest rate to the Bank of England base rate. In case you hadn't noticed, the base rate is currently at an all time low of 0.25%. But since the value of our currency has plummeted post-referendum, all predictions are that inflation will soon be roaring, and interest rates will eventually be on their way back up.
In short, it's hard not to see Lloyds' move as incredibly cynical.
The detail reveals that Lloyds' credit card Interest rates will now comprise of two parts. One part will be the Bank of England base rate, and the remainder will be your "personal interest rate". That means that as the Bank rate rises, customers are guaranteed to see their credit card rates go up - but Lloyds will still have the ability to push through further increases (and, in fairness, decreases as well) whenever it wants.
Hidden rate rises
The letter seems to suggest that while Lloyds will write to tell you about any changes to your "personal interest rate", it won't necessarily do this if the Bank of England base rate goes up. My letter is, in effect, advance notice of any increase that happens as a result of a rise in the base rate.
Linking credit card interest rates to base rate is a silly idea all round. Regular credit cards already have interest rates of between 16% and 20% - between 50 and 80 times the current base rate. That's because their business model has very little to do with base rate.
Most cards offer lengthy 0% periods - regardless of what base rate is doing. And as base rate has fallen over the past 10 years, the standard interest rate on cards has been going up, not down.
Hitting vulnerable customers
Because many customers don't pay any interest on their credit card, lenders charge high rates for those who do - a cross-subsidy model that means less well off borrowers are generally paying for the perks enjoyed by those who have the means and discipline to pay off their debt before it accrues any interest.
So pegging your interest rate to base rate means that a small group - comprising of a number of more vulnerable customers - will see price rises imposed on them, but without necessarily noticing.
It's worth saying that Lloyds is not the only bank to do this. Barclaycard is doing exactly the same thing. Amusingly, the Barclaycard website says it's doing this "to make sure that customers can see how a change to the Base Rate directly affects their interest rates". How good of them.
Blow for transparency
To be clear, my main concern with all this is not about the level of interest rates - it's about transparency - and the fact that banks seem to be using this as a way to push rate rises through unnoticed.
Back in 2008, the OFT told lenders that they need to write to customers if they're putting their interest rate up - and give them the chance to switch to a different card. But they provided an exception for increases that were linked to rises in the Bank of England base rate. That was an oversight in the regulations - an oversight that is now being exploited.
Sadly, the recent FCA credit card market study - a great opportunity to clear this up - has now been and gone. Time to pencil in another one.