Which? verdict on Halifax credit card changesPersonal APR tied to base rate - but is it fair?

13 April 2011

Halifax and Lloyds branch sign

Halifax and Bank of Scotland credit card customers will now be given a personal interest rate - but is it fair?

Halifax and Bank of Scotland (HBOS) have announced interest rate changes that will affect all existing credit card customers. Aimed at offering consumers greater transparency, the move means customers will have only one interest rate for all transactions, including purchases and cash withdrawals.

HBOS has introduced three key changes:

  • One single personal interest rate will be charged, specific to individual customers and how they use their card;
  • Customers’ interest rate will be linked to the Bank of England base rate;
  • Halifax is outlining the circumstances within which it will re-price a customer’s personal rate in the future.

New customers and Clarity card customers will not be included in the changes initially, but will be moved onto the new pricing structure in 2012.

Below, Which? credit card expert Martyn Saville looks at each aspect of the new pricing structure, explaining the pros and cons and giving a verdict on the new scheme.

Personal interest rate based on how a customer uses their HBOS credit card

How it works: From August 2011 existing customers will be moved onto a single personal rate of interest. There will no longer be different rates charged for purchases and cash withdrawals. 

Customers’ new personal rate will be an average of the current standard interest rates applied to the balances on their credit card between January and March 2011. For example, if you have an outstanding balance that is purely made up of purchases, your personal rate will be set at your purchase rate. However, if your outstanding balances is made up of a combination of purchases and cash withdrawals, your personal rate will move to an average of the rates applied across these balances.

Pros: The new system makes it easier to know what interest rate you'll pay, no matter what the transaction. If you've only used your credit card for purchases in the first three months of 2011, your rate shouldn't increase. In fact, many customers will see their interest rate fall. And if you need to use your credit card for an emergency cash withdrawal in the future, you'll pay a lower rate than you would at the moment. Promotional 0% balance transfer deals will still be offered.

Cons: If you've used your card for cash withdrawals recently, chances are your purchase interest rate will go up, costing more if you borrow on the card. Cash withdrawals come with no interest-free period and there's a 3% cash withdrawal charge on each transaction. Even if cash withdrawals now have a lower interest rate, this does not mean they are good value.

Verdict: New rules came in at the end of last year that mean any repayments you make against your credit card balance will go against the most expensive debt first. This is usually cash withdrawals. The new Halifax system bypasses these rules by having one rate for everything. 

If you've withdrawn cash on your credit card in the first quarter of 2011, you may well end up paying more. Rather than pay off cash withdrawals first, the new rules will mean these withdrawals are lumped in with purchases and paid back over a longer period. You'll probably be paying a lower rate on those withdrawals than you are at present, but you'll be paying them off for a longer period. And your interest rate on purchases will be higher than it is now.

Card fan

Will the new interest rate calculation method from Halifax and Bank of Scotland be copied by other credit card providers?

Credit card interest rate linked to Bank of England base rate

How it works:  From November 2011, HBOS customers' new standard credit card rates will be linked to the Bank of England base rate. If base rate increases by 0.25%, so too will your credit card interest rate.

Pros: The new system is similar to the way tracker mortgages work, so is easy to understand.

Cons: Bank of England base rate is only going to go one way in the coming months - up. While this new system will ensure that credit card customers benefit from any future falls in the Bank of England base rate, this isn't going to be relevant in the short to medium term as interest rates are expected only to increase.

Verdict: Locking the rate into base rate when this is at a historical low and likely to increase feels like a cynical ploy to squeeze more interest out of HBOS customers. Most Halifax credit cards currently charge an APR of 15.9% to 16.9%. Base rate is still at 0.5% and Libor (the rate at which banks lend to each other) is well under 1%. Linking the rate directly to changes in base rate does nothing to address the complete mismatch between the cost of borrowing and the current base rate.

Halifax outlines circumstances under which interest rates will change

How it works: HBOS has set out five circumstances under which it may change your personal rate from October:

  • A customer has not kept to the conditions of their credit card account (e.g. 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;
  • HBOS experiences or anticipates changes to the cost of running its business. This could be due to changes in operating costs, such as having to hold more regulatory capital.

Pros: The first three factors are within the customer's control and will allow them to take action to maintain or reduce their personal interest rate.

Cons: While all lenders use information from credit reference agencies when setting interest rates, all too often customers are given no specific reason for the increase in their APR, other than a generic message blaming their credit file and suggesting they check their credit report. While HBOS will tell you which credit reference agency it is using, it will not always tell you what evidence within that credit report is being used to judge your creditworthiness.

Verdict: Many of the reasons set out by HBOS will allow consumers to take control of their spending patterns and therefore influence the interest rate they pay. However, the final point whereby interest rates can go up just to pay the bank's running costs is so vague as to be meaningless. 

Forthcoming bank reforms are likely to force banks to hold more capital and to separate their retail operations from their investment business. The fifth circumstance outlined above suggests HBOS plans to offload its regulatory costs onto its credit card customers.

Take action - switch credit cards or reject your rate rise

If you're a Halifax or Bank of Scotland customer, look out for a letter in the post explaining your own personal rate. If you're happy with the new rate, carry on using the card but don't forget to regularly check the rate you're on - HBOS will be reviewing customers' rates every six months, adjusting APRs both up and down.

If you're not happy with your new rate, you have three options:

  • Appeal directly to Halifax or Bank of Scotland, asking them to review your individual case. If your spending in January, February and March was not typical of your usual spending patterns, you may feel you're being treated unfairly. We spoke to HBOS who confirmed that they would double check your spending behaviour against the final quarter of 2010 to make sure there weren't any blips, but you may still want to challenge your new rate if it seems unfair.
  • Freeze your card and pay back what you owe at your old rates. Under new rules that came in at the end of 2010, you have the right to reject any increase in your APR, cancel your credit card and repay what you owe over a reasonable period. So long as you make at least the minimum monthly repayment, you won't have to pay it all back at once.
  • Transfer your balance to a 0% balance transfer credit card from a different provider. The current best 0% deals offer up to 20 months interest-free.
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