Understanding increases to the cost of credit

8o February 2023

Right now, the high cost of living is having a real impact on people’s lives. High inflation, driven by rising energy and food prices, means that many people are having to make difficult decisions about their finances.

Low and stable inflation is vital for a healthy economy, where people can plan for the future with confidence. This isn’t the environment we’re experiencing right now, as inflation has hit its highest rates in more than 40 years. One of the levers that the Bank of England can pull to counter rising inflation is to increase interest rates, helping the economy grow and reducing the pressures many people face on their day-to-day finances. For this reason, you may have seen that the Bank of England recently announced an 0.5% increase in its base rate from 3.50% to 4% on 2nd February 2023.

We’ve all seen the headlines where these interest rate increases will directly impact mortgage repayments for those not on fixed rates, but what about other lending, such as loans and credit cards? If you’re paying back a loan, the good news is that your interest rate was locked in when you signed the credit agreement, so this won’t change. The interest rate charged on credit cards, however, can fluctuate.

There are two ways this can happen:

1. In response to market conditions, such as changes to the Bank of England’s Base Rate – this is known as a ‘general reprice’

2. In response to your card use and management (such as whether you make payments on time) and changes to your credit profile – this is known as ‘risk-based repricing’.

There’s a lot of general repricing happening within the market at the moment as lenders respond to changes in the economy and the rising cost of providing credit.

Understanding the current economic climate can be challenging. While everyone will be affected in different ways, we believe it’s important that our customers understand how general repricing works and why your card provider may do this. So, we’ve pulled together some helpful guidance to make things a little bit easier.

What is driving inflation?

Right now, high energy prices are the main reason behind high inflation. Several other factors have contributed to the rising cost of living, including the fallout from the Covid-19 pandemic and Russia’s invasion of Ukraine, which has led to huge increases in the cost of gas and food prices.

As life began to return to normal after the pandemic, oil and gas were in greater demand. However, the war in Ukraine has meant less is available from Russia, which has placed further pressure on prices.

At the same time, while the UK may be out of strict lockdown measures, other countries worldwide still face strict regulations. This means there aren’t enough products to go around; fewer businesses are working with fewer staff producing fewer items, which has led many organisations to charge more for their goods and services.

With costs rising, many people around the globe are feeling the pinch and seeing their pay packets diminishing in value. On the other hand, rising interest rates mean that savers also see top rates, enabling them to make better returns.

If my credit card interest rate goes up, will I pay more each month?

If your credit card's annual percentage rate (APR) has increased, it’s highly likely that your minimum monthly repayment will also increase. You can ask your credit card provider for an illustration of how much your minimum payment will increase if they’ve not provided this to you.

However, seeing increases in monthly minimum payments is dependent on a number of factors, such as:

Your card balance – for example, if your balance is low, you may find that your minimum repayment remains at £5 (this is the lowest repayment amount for most credit cards).

The interest-free period for purchases – with our Wave card, purchases are interest-free for 56 days, which means that if you pay in full each month, you won’t be charged interest on your purchases at all.

How much you can pay off your balance before the new interest rate becomes applicable – all credit card providers must provide you with at least 30 days’ notice to change your interest rate, giving you an opportunity to pay down your balance under your current interest rate. We understand that this might be difficult with the cost of living crisis, but it’s worth bearing in mind.

Support with the cost-of-living

If you’re concerned about increases to the cost of credit and the rising cost of living, you’re not alone. If you’re struggling with your finances, there are plenty of free and independent advice services available to support you and help you make things more manageable.

StepChange provides free debt advice to help you deal with your debt and set up a solution. We’re here to help you.

Citizens Advice
Citizens Advice offers free and confidential advice for debt and money management, benefits, housing and other life areas.

MoneyHelper is a free service provided by the Money and Pensions Service, sponsored by the Department for Work and Pensions.

Turn2us is a national charity providing help for those who are struggling financially.