Card debt may rise as rates continue to soar

New data has suggested credit card debt could increase as providers continue to hike their charges.

Such a development is taking place because of the credit crunch, according to finance website Moneycast.co.uk.

It has tracked the average annual purchase rates (APRs) on cards and found 2006 marked a turning point in the pricing of such accounts.

The typical APR was 21.1 per cent in February 1998, but fell in every year bar 2001-02 to reach 14.8 per cent in early 2006, a trend Moneyfacts said was due to increased competition in the market.

However, this changed from 2007 onwards as the credit crunch took effect, with only the 2007-08 period seeing a fall.

Moneyfacts spokesperson Michael Slade said this was due to the economic situation, explaining: “The UK continues to suffer from a high level of unemployment and providers are worried about the increased risk of customers not repaying their debts.”

He added: “This increased risk continues to be passed on to both new and existing credit card customers through higher interest rates.”

And the situation is set to get worse, Mr Slade suggested, due to the “dent” in revenues the imposition of positive order or payments rules will make.

This will ensure any money paid off a card will go towards the most expensive debt first instead of the least costly as was usually the case previously, something that will save interest for consumers but cost lenders.

However, card providers will respond to this by hiking their APRs further, Mr Slade predicted.

Managing director of the Debt Advice Foundation David Rodger recently agreed the order of payments change is welcome, but said the biggest issue – which has not been addressed – is the size of credit limits, which he argued are allowed to be set too high.

By Amy White