Over the last couple of weeks Barclaycard have been writing to their customers explaining that they are changing the way they will be setting interest rates. Here is the start of the email I received:
The changes they are making
At the moment, everyone with a Barclaycard has an standard interest rate for purchases and a different interest rate if you withdraw cash – you may also have a promotional interest rate eg “0% on balance transfers for 15 month”. Barclaycard can change your standard rate and your cash rate, but it has to write to you and give you advance notice of the change. If you don’t like a rate increase, you can choose to reject it and stop using the card – then you can stay on the old rate until the balance is cleared.
From February 2016, Barclaycard will change everyone’s standard and cash interest rates whenever the Bank of England changes its Base Rate. So if your standard interest rate is 18% and the Bank of England raised its base rate by 0.25%, your standard rate will be increased to 18.25%. Promotional interest rates will not be affected.
After the Bank of England makes a change, your next monthly statement will be unaffected, with the old rates being charged. The increase in your interest rate will apply from the day after your next monthly statement.
Some people are also being told that their interest rates are changing now. Someone I know has been told their interest rate is being reduced by 2%, but I didn’t get that section in my email!
Why are they doing this?
Base rates haven’t changed since 2009 – over 6 years! The Bank of England has been saying for a while that when it starts increasing rates, it will do so very gradually. The first rise isn’t now expected until mid 2016, but from then on there could be several rises of 0.25% coming over the next year or two.
If Barclaycard hadn’t changed the way it sets its interest rates, it would have had to write to all its 700,000 customers possibly two or three times in a year, notifying them of each small increase. But now it has told all its customers that its rates will be going up with Base Rate, it doesn’t have to send out these letters. That’s going to save them some money, but perhaps equally importantly it means that customers won’t have the chance to reject the rise by stopping using the card and staying at the old, lower rate.
Barclaycard isn’t the only lender doing this. Lloyds have set their credit cards interest rates this way for several years – but as there haven’t been any rate rises, this hasn’t been very visible. In May 2015, Halifax switched to setting its interest rates this way.
Should you care?
The first interest rate rises are expected to be small. A half a percent rise on a balance of £5,000 would only be a couple of pounds a month extra your credit card bill – you might not even notice it. But a few of these rate rises will start to add up…
If you have been wanting to get your credit card debt down for a while but not started to tackle it seriously, perhaps this should be the incentive you need? Leaving your credit card at home is the vital first step!
If your credit rating is very good at the moment, a good option would be to get a long 0% balance transfer deal. But follow this through with making a large enough payment every month to clear the balance by the end of the deal. Recent research has shown that 29% of people getting a good 0% balance transfer or 0% on purchases deal end up with MORE debt at the end of the deal than they had at the start.