Credit card interest rises to 13-year high

Rates have been increased on 18 credit cards during the first four months of the year, compared with just four in the same period of 2010, according to financial information group moneyfacts.co.uk.

The majority of providers raised their rates by 1 per cent but four cards, all of which are supplied by Government-backed Lloyds Banking Group, have introduced a 2 per cent rise.

The moves have pushed up the average interest rate on credit cards to 19.1 per cent, up from 18.7 per cent a year ago, and is the highest level since February 1998.

Rates are expected to continue rising in the coming months, as providers adjust to the cost of new rules introduced at the start of the year under which firms must use customers’ monthly repayments to pay their most expensive debt first.

Credit card companies are also likely to face a hefty bill from compensation payouts for their mis-selling of payment protection insurance after the British Bankers’ Association lost a judicial review on the issue last month.

The Financial Services Authority previously estimated the compensation bill for the financial services industry to be around £4.5bn.

But Lloyds Banking Group said it was withdrawing from any further legal action and had set aside £3.2bn for redress, suggesting the final total could be considerably higher.

Michelle Slade, spokeswoman for moneyfacts.co.uk, said: “It is unlikely we have seen the last of the increases and Moneyfacts expects more providers to follow suit.

“Several of the biggest providers of credit cards, including Barclaycard, Halifax, Royal Bank of Scotland and Santander, have been party to the increases.”

But she added that although interest rates had increased, credit card providers were offering the longest ever 0 per cent interest balance transfer deals of up to 18 months.

She added: “Providers hope to bank on customers’ reluctance to keep switching and can claw back the lost interest during intro periods once they end.”