Reader Question:
I believe this is the second time I've contacted you, but this time it's to ask your advice.
My Bank of Scotland credit card has advised me that from December they are
linking the standard interest rate to the Bank of England base rate, which
could well affect the minimum payment amount.
My question is this- is this another banking scam to squeeze more money out
of consumers, notably those at the "unable to repay the whole amount each
month" end of the spectrum? Is this rate likely to down as well as up? How
does it work?
My Response:
Hi Richard,
Good to hear from you again.
You don't provide full details of the proposed changes but it sounds like you are referring to the credit card changes announced by Halifax Bank of Scotland (HBOS) back in April.
To clarify, HBOS announced two key changes to customer interest rates:
1) From August 2011 interest rates applied to customers' credit card debts will revert to a new personal interest rate, based on how they used their card between January 2011 and March 2011. This new personal rate will be applied to all types of transactions on the account going forwards. So if you made a lot of cash withdrawals between January and March your personal interest rate will be that much higher.
2) From November 2011, HBOS customers' new standard credit card rates will be linked to the Bank of England (BOE) base rate.
HBOS can also can increase this new rate under certain circumstances, namely:
- A customer has not kept to the conditions of their credit card account; that is they have missed several payments or have gone over their credit limit multiple times.
- The transactions made by type, value and frequency indicate riskier behaviour, such as an increase in cash withdrawals.
- They haven't kept to the conditions of another product they have with Lloyds Banking Group.
- There has been a change to their financial status as recorded with external credit reference agencies.
- We experience or anticipate changes to the cost of running our business. This could be due to changes in operating costs, such as having to hold more regulatory capital.
HBOS claims
HBOS claim that that a majority of customers will either end up paying less interest than before, exactly the same amount of interest or less than 2p more for every £1,000 they borrow.
Also, they claim the purpose of the changes is to make their credit card interest rates more transparent and easier for consumers to understand.
My thoughts
Clearly linking the interest rate to the BOE bank base rate might aid transparency, given that credit card interest rates have previously been criticised for being detached from the base rate. But call me cynical, linking your new personal rate to the bank base rate when it is at a 300 year low of 0.5% means the only way is up.
In theory your credit card rate could go down as well as up with future movements in the bank base rate. But the bank base rate can't realistically go any lower at the moment.
At the start of the year the bank base rate was anticipated to have risen already but this view has since changed. Whether HBOS were hoping for an increase in the bank base rate which they could then pass on is anybody's guess. But while the base rate will influence your new interest rate HBOS can still alter it whenever they want.
Previously different types of credit card transaction (i.e. purchases or cash withdrawals) were charged different interest rates. Current banking rules stipulate that any repayment made by you has to be offset against the part of your debt paying the highest interest rate. This is to a consumer's advantage. Obviously if you now only have one personal rate then this gets around these rules. So make of that what you will.
But remember if you don't like the changes then take your business elsewhere. Also don't forget that borrowers can reject credit card increases.
I hope that helps
Best Wishes
Damien
Money to the Masses
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