The Bank of England’s base rate has stood at just 0.5% since 2009 and it’s reasonable to say that if it does change the only way it will move is up. If you have a credit card, would this mean that your APR would change too?
In most cases, no
Historically and generally speaking, any change to the base rate doesn’t necessarily affect the interest you pay on your credit card balance. You will have agreed to the Annual Percentage Rate (APR) – the interest rate along with any fees – when you took out the credit card, and - unless your lender tells you there is - there’s unlikely to be a direct link between this and the base rate. If the base rate changes, the rate you pay might too - but it might not.
Check with your lender
That said, over the last few years, some credit card providers have announced that the interest rates they charge for paying for items or withdrawing cash with a credit card will now track the base rate. If this is the case for you, the interest you pay will change if the base rate does.
Halifax notified its credit card customers in 2011 that the APR they’re charged will follow the base rate. And last year Barclaycard followed suit, by announcing its interest rates would track the base rate from February 2016.
If you’re wondering whether a change to the base rate could affect your credit card bill, the best thing to do is check with your lender.
How much would it cost me?
Let’s look at Barclaycard for an example of how much a change to the base rate could cost you if you have this card. If the Bank of England’s Monetary Policy Committee votes to put the base rate up by 0.25%, taking it to 0.75% overall, you will be charged an extra 21p a month for every £1,000 of your balance. This does not include any promotional balances you’ve signed up to, as a base rate rise or fall would not affect this.
Now, 21p per £1,000 doesn’t sound like much at all, but if your credit card balance is already pretty big then you may notice this increase.
Of course, if the base rate were to go down your credit card interest would follow suit. But when the base rate is already so low realistically there is little prospect of this happening.
Not just credit cards
It’s not only customers with a credit card rate that’s linked to the base rate who could notice a difference if the base rate goes up, but also mortgage customers. That’s because these products are far more likely to track the base rate. If you have a tracker mortgage, for example, the base rate going up means your interest will go up too. This is not the case with fixed-rate mortgages, as you pay a fixed interest rate until the end of the offer period.
Nowadays, mortgage providers check that you will be able to keep up with your mortgage payments if the interest were to increase by a few percent – providing your income were the same and your spending habits had not changed massively. An increase of 1% might not seem like much, but on a tracker rate mortgage a rise of this much would mean you pay £55 more each month for every £100,000 you owe.
One option if you wish to avoid this is to switch to a fixed-rate mortgage. You can find out more about the advantages – and disadvantages – of doing this here.
Not all borrowers will feel the effect of a rate rise, though. Products like unsecured loans tend to come with an interest rate that’s fixed for the life of the loan, so if the base rate went up you wouldn’t have to pay more. If in doubt, we advise you get in touch with your lender to check whether a change to the base rate will have an impact on you.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.