Today, Capital One raised the interest rate on its credit cards by 90%, and similar increases may soon be on the way from other providers. Here's how to fight back against the rate hikes!
I think most of us will agree that credit cards can come in very handy at times. But the major drawback to using a credit card is the high rate of interest you'll often be charged.
Of course, if you're financially savvy, you're bound to already be using the right credit card for your needs - and that's likely to be one charging a low rate of interest.
Unfortunately, however, even if you are financially savvy, credit card providers seem to have it in for us at the moment. And for thousands of Capital One customers, the right credit card may have just turned into the wrong one, after the credit card provider announced that interest rates are set to almost double from 8.01% to a whopping 15.31% in March. That's a 90% increase - ouch!
Capital One is using the poor economic environment as its excuse, but of course, it could be the start of things to come, with speculation that other credit card providers may soon follow suit.
So if you're worried you might soon get whacked by a higher rate of interest on your credit card debt, what can you do?
Draw up a budget
When money is a little tight, the first thing to do is to reign in your spending and get budgeting. And fortunately, here at lovemoney.com, we have a fabulous tool to help you do just this.
All you need to do is register for our newly-launched online banking service. This will allow you to see all your transactions in a categorised pie chart over the past month, so you'll be able to see at a glance what you're spending your money on.
You can then use the information about your monthly outgoings and earnings to create a budget using a statement of affairs calculator or this budgeting calculator from the FSA. Simply enter the figures in the boxes provided to view an instant snapshot of your household budget and personal balance sheet. This will help you to take control of your finances.
It's also well worth seeing whether you can make any cutbacks anywhere - could you spend less on socialising, or save money on your food bills? Perhaps it's time to see whether you can get a better deal on your gas and electricity tariff? Adopt our goal to get help on lowering your household bills.
Slash those debts
Once you've registered with lovemoney.com, you'll be able to adopt our goal on paying off your credit card debts. This goal will take you through a step-by-step plan to help you cut the cost of your debt and show you how not to get caught out by sneaky tricks such as negative order of payment (where your most expensive debt is paid off last) and minimum monthly repayments.
This goal will also teach you the art of snowballing. In a nutshell, this enables you to tackle your debt faster because you'll be paying off the most expensive debt first. All you need to do is work out which of your debts is charging the most interest and then start throwing as much cash as possible towards this debt (while still paying the minimum monthly payments on the rest of your borrowings).
Once you've paid off this debt, put the extra cash towards the next most expensive debt, and so on. By doing this, you'll clear your debt more quickly.
Get a better card
Of course, one of the best ways to reduce your credit card debt is to simply get a better credit card - and one that pays a lower rate of interest.
If you currently have a lot of debt sitting on a credit card which is charging a high rate of interest, your best bet is to move it onto a 0% balance transfer card. The Virgin Credit Card, for example, offers a market-leading 16 months interest-free on all balance transfers. So this means you'll have 16 months to start tackling your debt head on, without worrying about the interest stacking up.
Just remember that you'll have to pay a transfer fee of 2.98%, and if you haven't cleared your balance before the 16 month interest-free period comes to an end, you'll be hit with an interest rate of 16.6%.
Alternatively, the Barclaycard Platinum Credit Card with Balance Transfer offers 0% on balance transfers for 15 months, and this comes with a 2.9% transfer fee.
If the amount of debt on your existing credit card is so high you're worried you may never pay it off, you could consider a lifetime balance transfer card instead. These cards promise to offer a low rate of interest for the life of your debt.
Take the MBNA Platinum Credit Card Visa, for example. This credit card offers a fixed interest rate of 5.9% until the balance is paid off in full. Just bear in mind that you will have to pay a transfer fee of 2%.
If you'd prefer not to pay a transfer fee, the MBNA Platinum Low Rate American Express Card might be more up your street. However, the interest rate is slightly higher at 6.7% and this rate is variable, so there's no guarantee it won't change.
Finally, don't forget to check out our videos on credit card debt: Slash your credit card debt in four easy steps and The three worst things you can do with your credit card. And if you have a burning question about your credit card debt, why not wander over to Q&A and ask other lovemoney.com members for advice?