Barclaycard Slashes Interest Rates

by Szu Ping Chan on 06 February 2009  |  9 comments
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Barclaycard is slashing the purchase interest rates on some credit cards by up to 5%. What does this mean for customers?

It’s not often you see headlines about credit card providers cutting interest rates. In fact, despite the Bank of England base rate being slashed eight times in 14 months, credit card APRs have only been going one way – and that’s up.

However, in a bold move earlier this week, Britain's first credit card provider Barclaycard announced it was freezing the prices for all its UK customers for at least the next four months.

In addition, at least three million of its 11.9 million existing customers will also see their purchase APRs reduced by between 2.5 and 5 percentage points.

New customers applying for its flagship Barclaycard Platinum product or the OnePulse will also reap the benefits, with the typical rate on both cards reduced by 2.5 percentage points to 12.4%.

Barclaycard's move goes against the grain of several of its rivals. Only last week, Capital One increased the rates on some of its credit cards by up to 7 percentage points, citing higher lending costs as the reason for the move.

Barclaycard says it wants to help its customers over the coming tough year by offering extra support in 'innovative ways'. However, I can’t help thinking this is a move of forced generosity by Barclaycard.

Late last year, Business Secretary Peter Mandleson and Consumer Affairs Minister Gareth Thomas held a summit with the big credit card providers, warning them that the Office of Fair Trading could be brought in to investigate if the sector did not make a strong commitment to treat customers fairly.

So, under a new code of practice agreed last December, interest rates now cannot be changed for new customers during the first 12 months of their agreement, and can only be revised once every six months thereafter.

Small mercies

Barclaycard may make themselves out to be the good guys in the credit card market, but considering the Bank of England base rate is now at a new low of just 1%, I think the move by Barclaycard is a small concession, and in my opinion will fail to help the customers who need it most.

For example, Barclaycard’s ‘Initial’ credit card, which is designed for those with a weaker credit rating, has a current purchase APR of 27.9%, and is not affected by these changes.

With the APR reductions only being passed on to customers Barclays identifies as having a ‘low risk’ profile, you could argue that those who need help the most will fail to benefit from these better rates.

Plan of action

Despite this latest news, it’s also important not to become complacent towards debt, as it can quickly start to mount. In fact, the overwhelming message you should take from all this is: if you can, switch.

Using a credit card calculator, I worked out that someone making minimum payments of 2% a month on a £2,500 balance would save £183 (taking into account a 3% fee) over the course of a year if they switched from a credit card charging 12.4% to a 0% credit card. On a £5,000 balance, the saving jumps to £366.

And, despite the credit crunch, many 0% deals are still available, with some offers taking you deep into 2010. The current market leader is the Virgin Money MasterCard, which currently offers 0% on balance transfers for a whopping 16 months (a 2.98% fee applies).

The moral of the story? Don’t get complacent! Barclaycard’s move may make a good headline, but in reality I think it's just a drop in the ocean when it comes to the issue of fairness and fees.

In the meantime, waiting for other credit card providers to follow suit could require a considerable amount of patience.

So, even if you are one of the customers who benefits from these cuts, unless you pay your balance off in full each month, you’d still be better off switching your debt to a 0% balance transfer card – it will save you much more money in the long run.

More: Yet Another Credit Cutback / Credit Card Rip-Offs That Should Be Banned

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