Credit Cards explained...

Credit card interest has risen once again according to the Bank of England. The average interest rate is now at its highest rate since 2002. It is currently 16.79%. However, despite this news, the bank rate is still at its lowest.

In 2010, £5.3 billion credit card debt was written off by the banks. David Black from Financial Analysts Defaqto, states:

“Write-Offs probably reflect historic lending on cards. In recent years credit card companies have been much more careful about who they will lend to, in terms of affordability and over-indebtedness.”

The amount of customers defaulting on their bad credit credit cards is roughly around 10% of all credit card borrowers. This has led to credit card lenders using wider profit margins to make up for the losses. The amount of losses that banks made due to credit card debt has increased dramatically over the past few years. In the 1990’s there wasn’t as much of a problem. In fact, default rates were quite low. In 1995 there were £138 million write-offs and by 1999 there were £490 million write-offs.

It wasn’t until after personal lending increased in popularity that write-offs started becoming a big problem. The rate of £5.3 billion over the last year shows just how big a problem this has become. Credit card spending is extremely popular these days, with many families turning to credit cards to fund their monthly bills and expenses. It has also recently been reported that adults living alone tend to spend more money on their credit cards to live comfortably.

It has been estimated that the interest rates on unsecured lending, including credit cards, would rise by 2%-3% in the next few years. If this were to happen then it would increase a family’s household credit card debt and loans by up to £1,800 a year. That is quite a big increase that not many people could afford these days.

There has also been recent research which showed that many consumers are still struggling to pay off their Christmas costs. The average person will finish paying off Christmas 2010 by June 2011. There will also be many people paying for their holidays abroad with their credit cards. Holiday debt also takes months to pay off.

There has been some let up over the past month for those who have a reasonable credit history. This week rates have dropped a little for the first time in almost four months. According to CreditCards.com, the average on Wednesday 2nd March, the average rate was now 14.66%. This is not the average rate for those with poor credit however. The average is still 16.79% for most consumers.

Overall experts do predict that while there has been a slight drop in interest rates recently, they will be expected to rise again over the course of 2011. With many people already struggling with credit card debt, this could have a devastating effect on their finances. It is advisable that consumers pay off any debt that they have as soon as they can rather than just paying the minimum. That way if rates do increase, you will not have to worry.