Simon Read: We have soaring credit rates as well as shrinking savings. What can you do to make things better?

15  January 2013

Just in time for the expected seasonal spending splurge, credit card rates have hit an 18-month high. According to rates analysts at Moneyfacts, the average annual interest rate charged by credit cards now stands at a hefty 19.1 per cent.

The bank base rate is still stuck on its record low of 0.5 per cent – a level it has remained at now for three and a half years. Meanwhile savings rates – already at pretty unappetising levels – are slipping down. Many companies have been busy pulling their best-buy deals to replace them with much more paltry returns.

In the last week, for instance, we’ve seen the AA withdraw its 3.3 per cent, three-year fixed rate and replace it with a 2.7 per cent deal. Meanwhile, Saga pulled its 3.3 per cent, three-year, fixed-rate ISA and introduced a 2.75 per cent offering instead.

The situation for borrowers was worsened by the slight climb in the inflation rate announced this week. It went up from 2.2 per cent to 2.7 per cent which, according to the experts at Savings Champion, left no easy access or notice accounts that beat inflation for basic-rate taxpayers.

If your savings aren’t earning more than the current rate of inflation then, effectively, your cash is shrinking as its spending value is declining.

“With savings rates continuing to fall, it’s vital for savers to find and track the best savings accounts for their circumstances,” says Anna Bowes of Savings Champion.

The site has a helpful rate checker, which lets you know if the deal on your savings account changes. With rates so low at present, ensuring you make your nest-egg work hard is essential if you want to see it have any chance of growing.

So while a 0.6 per cent fall in the offering may not seem all that much, it’s monumental bearing in mind the low returns being paid. In fact it means the returns on the AA account, for instance, have fallen by almost a fifth.

But with savers struggling to find hardly any decent returns for their cash, what about those who borrow on their credit card? They can be forgiven for thinking that they’re being taken advantage of by the plastic-card companies.

But what the credit-card firms are taking advantage of is our apathy in not switching deals. In effect, anyone paying 19.1 per cent or so is funding the plethora of 0 per cent offerings that the card companies use to win new business.

Some critics have also suggested that the credit-card companies are hiking rates to recover the cost of the payment protection insurance mis-selling scandal. The total compensation bill to banks and other firms is now expected to top £15bn.

By increasing rates and charges, the banks and credit-card companies can effectively make their customers pay for their own compensation pay-outs, is the theory. The finance industry even has a name for it – the waterbed effect.

It’s called that because the financial ripples caused by the compensation payouts can be evened out by the increased cash brought in by higher borrowing rates.

Oddly enough the rates on personal loans have been falling, with some lenders offering their lowest-ever deals of 5.5 per cent or lower.

Why doesn’t the same thing happen with credit cards? Because the lenders know that millions turn to plastic when they’ve run of out cash – especially at Christmas – as it’s so easy to do so.

Applying for a personal loan, on the other hand, can be a more difficult process, and there’s also the risk of being turned down, especially if you’re struggling. In other words, personal loans need to be sold, while the credit-card companies already have their customers signed up.

So, as with savings accounts, you should check the interest rate and switch to a better deal to save.

“If in doubt, shoppers should opt for an introductory interest-free purchase card, which gives them some breathing space so they can focus on repaying solely the amount they have spent,” advises Rachel Springall of Moneyfacts.

But, back to the question I posed in the header: what can you do to make things better?

The answer, if you have savings or need to borrow, is find the best deals. It’s a message that you’ll find coming from every finance expert, be they money-saving or investment-based.

But it’s a message that gets repeated again and again because it’s clear that so many people don’t bother to act upon it.

Take your heating bills. It’s a fact that the difference between the best deals and the most expensive is hovering around the £300 mark. Yet some people are still paying the highest rate.

No-one can be happy to be paying over the odds, yet many do nothing about it. So if you’ve sorted your finances recently to ensure you are getting the best rates, check with your friends and family to ensure that they aren’t being taking for a ride by their suppliers.

And if you haven’t had a good look at your accounts and deals in the last few months, do so. It’s almost certain that even if you took out a best-buy deal as recently as six months ago, there is likely to be better offerings around now.

And if you have a deal that’s a year or more old, then it’s certainty that you really are being taken for a mug with lower savings rates or higher interest charges by your bank, credit card company or building society.