The effective interest rate on credit cards jumped by 34 basis points to a new record high of 20.76 per cent in July, new data from the Bank of England shows.
Some experts have warned that with credit usage remaining high, more banks and building societies could reduce people’s credit and card and overdraft limits out of the blue and without warning.
Net borrowing of consumer credit by individuals fell to £1.2billion in July, from £1.6billion in June. This was driven by a fall in borrowing through forms of consumer credit like car dealership finance and personal loans.
But, borrowing on credit cards remained broadly unchanged for the third consecutive month at £600million.
Fresh high: The effective interest rate on credit cards jumped by 34 basis points to a new record high of 20.76% in July, Bank of England figures show
Riz Malik, director of independent mortgage broker, R3 Mortgages, said: ‘Rising effective interest rates are clearly troubling for individuals with fluctuating rates on their credit cards.
‘However, another emerging threat is sudden and out-of-the-blue reductions in credit card limits.’
He explained: ‘Recently, I observed a credit card company informing a customer that their £14,000 credit limit was being reduced to £1,000 because of non-utilisation.
‘The same pattern has been emerging with overdraft facilities. This mirrors what happened during the early days of the credit crunch and could leave many exposed.’
Neezam Romjon, co-founder of Rebus Financial Services, said: ‘With more and more people relying on short-term credit to cover the rise in living costs, this is concerning.
‘The good news is that there are still 0 per cent balance-transfer deals out there for those who qualify. Not keeping on top of this will prove to be a costly mistake.’
Borrowing: Net borrowing of consumer credit by individuals fell to £1.2bn in July, from £1.6bn in June
Meanwhile, Mike Staton, a director at Stanton Mortgages, said: ‘With ever-increasing costs, people are resorting to lines of credit to maintain a lifestyle that was not possible 20 years ago, and this is massively affecting the lending capacity of a homebuyer.
‘If you are looking to buy a home, steer well clear of credit cards.’
The annual growth rate for all consumer credit saw a slight decrease to 7.3 per cent in July, compared to 7.5 per cent in June, according to the Bank of England.
Similarly, the annual growth rate for credit card borrowing and for other forms of consumer credit slipped to 11.7 per cent and 5.5 per cent respectively, down from 11.9 per cent and 5.6 per cent in June.
The effective rate, which reflects the true cost of borrowing, on new personal loans rose to 8.61 per cent in July, up from 8.41 per cent in June.
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