A transparently bad deal on credit cards

Halifax this week said it is making sweeping changes to its interest charges on credit cards. From August, HBOS customers will be moved on to what the bank claims is an easier to understand ‘single personal rate’ of interest.

This means they will pay the same rate for both purchases and cash withdrawals (in the past the rates have tended to be different). There will be no standard rate – the rate each customer ends up with will depend on how they used their card in the first three months of 2011. If you made no cash withdrawals, your rate will stay roughly the same as it is now for purchases. But if you have, your rate will rise to somewhere between the current purchase rate and the withdrawal rate.

However, not everyone will be affected: those with Clarity cards (these already have only one rate) and those who have been HBOS credit-card customers for less than six months won’t see any change until later this year.

But this seeming simplification isn’t the only change HBOS customers are to suffer. From November there is another, when HBOS credit-card rates will be linked to the Bank of England base rate. So when the base rate rises, so will the card rate. This is an extraordinary move, says Martyn Saville of Which? in The Daily Telegraph. The banks have long argued that credit-card rates aren’t linked to the base rate – that’s why they haven’t cut rates while the base rate has collapsed to historic lows. Instead, they like to claim that credit-card rates are based on the cost of lending and the risk of bad debt. So announcing now that they are to link it to the base rate – just as that is about to rise – “seems like a cynical ploy to squeeze more interest out of HBOS customers”.

This is all bad news for HBOS customers. The interest charges may be ‘transparent’, which is HBOS’s argument for the change, but that transparency won’t change the fact that this is a pretty bad deal. Note that the average APR on an HBOS credit-card rate is a hefty 18.4%. The concern for card users in general is that the changes “could be seen as a profit-generating blueprint and could be quickly adopted by other card companies”, says Andrew Hagger of Moneynet.co.uk. Lloyds TSB, which, like HBOS, is part of the Lloyds Banking Group, is already reviewing the way it charges interest on its cards.

In the meantime, anyone looking for a more reasonable deal might look to the Barclaycard Platinum Simplicity, which has an APR of just 7.9%. Otherwise, if you have a big balance to pay off, go for Barclaycard’s Platinum card. These offer 0% on balance transfers for 20 months – although they do come with a 3.2% balance transfer fee.

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