Halifax credit card customers will feel base rate hike

By Helen Fowler

Experts are questioning a decision by Halifax to tie its credit card interest rates to the Bank of England base rate on the eve of an anticipated rise in that rate. The base rate is what the central bank charges other banks for secured overnight lending.

Despite Halifax's previous insistence that the base rate does not affect its credit card rates, it's now reversed that rhetoric and alerates-risingrted cardholders by letter that it will pass any rise in the base rate on to them in full from 13 February. The move has provoked accusations of opportunism.

"You do have to question the timing because rates are only going to go one way," says Andrew Hagger, of MoneyComms. "The card provider is going to benefit."

Rates on Halifax cards vary from 12.9% to 19.95%, while the Bank of England rate has remained at 0.5% since March 2009, a historic low unmatched in 300 years. 

Growing speculation suggests official rates may be set to rise. The Halifax letter coincides with growing optimism over the UK economy that could lead Bank of England governor Mark Carney to hike rates. The unemployment rate for October to December 2013 stands at 7.4%, according to Office of National Statistics data, down by 0.3 percentage points from the previous quarter. 

As part of the Bank's "forward guidance" policy, Carney has said he will not raise the base rate from 0.5% until unemployment drops to 7%. With the UK's economic recovery strengthening, observers suggest that the country may reach that level of employment sooner than expected.  

"Card providers used to say there wasn't a direct link [between their charges and Bank of England rates]," says Hagger.  "Now, they do seem to have changed tack and done a U-turn. And it's at a time that suits them. This is taking the biscuit a little, when there's only one winner."

Despite base rates being so low, the average UK credit card APR has been rising in recent years.

"Base rate is at an extraordinarily low level not previously seen in 300 years, and there is criticism that the average credit card APR (as calculated by the Bank of England) has recently been edging upwards," says the UK Cards Association.

The Halifax move is ironic, given that card providers have previously insisted that the base rate doesn't affect their rates as much as you might think.

"At points where the base rate has moved down, providers have put out releases saying they do not get any benefit from falling rates," said Hagger.

Credit card companies maintain they could not lower their APRs when base rates fell about five years ago because they face a number of running costs that do not exist with other forms of lending, such as mortgages or personal loans.

According to the UK Cards Association, the cost of borrowing money to finance cardholders' balances generally accounts for only a proportion of credit card issuers' costs. Other costs such as authorising and processing transactions, posting out statements, issuing cards, handling customer queries, preventing and covering the cost of fraud losses, swallowing bad debts, and delivering innovation (such as chip & PIN or contactless card payments) may be rising while base rates are falling, it says.

A spokesperson for Halifax declined to say how many customers would be affected by its decision to pass on base rates changes as soon as they come into force. Numbers are thought to run into several millions.

See related: How to handle credit card debt while unemployed, What does "APR" really mean?

Published: 24 December 2013