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19 Sep 2019

American Express links credit card interest with the base rate: will you pay more?

Amex is also set to scrap its £12 fees for exceeding your credit limit

American Express credit card interest will vary in line with the Bank of England base rate from 1 October 2019.

The news comes as the Bank of England's Monetary Policy Committee meets today to discuss whether the base rate should be changed from the current 0.75% rate.

Amex currently sets its own rates, based on the individual applicant and its internal calculations. In future, your interest rate will combine the base rate with a 'personal rate'.

In addition, the credit card provider is scrapping its £12 charges for those who breach their credit limits.

We take a closer look at how the changes to interest rates could affect you, and whether you'll pay more if the base rate changes.

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How the new American Express interest rates will work

Under the new system, your interest rate on an American Express credit card will be a combination of your personal rate (set by Amex) and the Bank of England base rate.

Amex told us the personal rate will depend on your credit score and credit history.

The base rate part of the overall interest rate is pretty small. If your interest rate was 22.9%, some 22.15% of this is your personal rate, with the remaining 0.75% reflecting the current base rate.

While Amex has no control over base rate decisions, it can change your personal rate of interest at any time. However, you will be given 30 days' notice of any changes that affect your personal rate, and you should be given 60 days to reject the hike, cancel the card and pay back what you owe at the previous rate.

This system will apply to all transactions, apart from any that come under promotional 0% rates.

Due to the effect of compound interest, the APR on your card will be slightly higher than the 'simple interest rate'. Keep in mind also that if you're accepted for a credit card, you won't necessarily be offered the advertised rate. Consumer credit regulations state that the advertised representative APR only has to be offered to at least 51% of applications expected to result from the ad.

Will I pay more if the base rate changes?

As with any credit card, the interest rates will only affect you if you don't pay off your balance in full every month.

If you do pay interest, your rate will only go up if the base rate increases; if it decreases, your rate will reduce.

So, if your simple interest rate is 22.9%, for example, and the base rate is put up to 1.5% - which isn't particularly high - your rate will increase to 23.65%.

This may not look like much, but it can add up if you have outstanding debt.

Say you owe £2,000 over the course of a year. Initially, you'd pay £458 in interest. But after the hypothetical base rate rise, this would increase by £16 to £473.

The graph below shows how the base rate has changed since August 2008, with data from the Bank of England.

While the rate has remained below 1% for the last 10 years, unknown factors such as Brexit make it difficult to predict how it might move in future.

What causes base rate changes?

The Bank of England is responsible for setting the base rate, as a way to control the rate of inflation and maintain its 2% target. Its Monetary Policy Committee meets eight times a year to discuss whether the rate needs to change.

In theory, if inflation is too high, a base rate increase will push up interest on people's mortgages and savings. This encourages people to save more and borrow less, therefore reducing prices as retailers compete for people's cash.

If inflation is too low, a base rate reduction means people spend more due to cheaper borrowing and worse savings rates, so that retailers put up prices.

New vs existing customers

If you're an existing customer, and don't like the sound of these changes, you'll need to close your account.

To do this, contact Amex by 30 September, at which point your account will be terminated and you will no longer be able to use your card. Any outstanding balance will need to be paid off, but you'll keep your existing interest rate.

If you accept the changes, you won't have the option to reject them if a base rate rise pushes up your interest.

If you apply for an Amex card as a new customer, your card will automatically operate under the new interest rate rules and you also won't be charged for spending over your limit.

How does Amex compare to other credit card providers?

It's an expensive time to spend on credit cards. According to financial website Moneyfacts, the average credit card APR is currently 24.7%, the highest in 13 years.

The underlining purchase rate (which does not include a card fee) is also at a high, meaning you may be paying more to borrow for purchases outside interest-free offers.

The table below shows how average card purchase interest rates have fared since September 2017, with data from Moneyfacts.

Sept 2017Sept 2018Jun 2019Sept 2019
Average credit card purchase APR22.9%23.4%24.1%24.7%
Average credit card purchase pa rate20.99%21.37%22.05%22.53%

American Express offers a range of cashback, reward, low rate and 0% purchase credit card deals, each of which has different rates and terms to consider.

In our latest credit card satisfaction survey, American Express achieved our highest customer score of 79% and has been awarded Which? Recommended Provider status.

Customers rated the provider's customer service, application process and clarity of statement particularly highly.

Low-interest credit cards

If you want to borrow for purchases and pay the balance off over time, you could consider a low-interest credit card. These come with relatively low rates on purchases or balance transfers.

Some of the top low-interest deals include:

  • Tesco Bank Clubcard Low APR Credit Card: this offers 0% on balance transfers and purchases for the first month, and 5.9% APR on purchases thereafter, and there's no annual card fee. Don't use it to take cash out, though as ATM withdrawals are charged at 24.9% APR.
  • The American Express Rewards Low Rate Credit Card: purchase interest is set at 9.9% APR, and if you spend £1,000 in the first three months you'll earn 2,500 bonus Membership Rewards points. Cash withdrawals are charged at 27.9% APR.
  • Halifax Flexicard Credit Card: both cash withdrawals and purchase interest are set at 9.9% APR; balance transfers made after the first 90 days will incur an additional 3% fee.

However, this option often isn't as cheap as a 0% purchase or balance transfer deal, and some cards only feature the lower interest rate on certain types of transactions, like purchases, or just cash withdrawals.

You can search through hundreds of credit cards with the Which? Money Compare credit card tables.

When do I pay credit card interest?

If you withdraw cash from an ATM using your credit card, or pay off anything less than the full amount on your credit card statement, you'll usually be charged interest.

Most credit cards offer an interest-free period on what you've bought if you pay off your bill in full. But, if you don't, the interest on the purchases is usually backdated to the date you bought them.

Interest rates will vary depending on the type of transaction; withdrawing cash will usually be more expensive.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Money Compare is a trading name of Which? Financial Services Limited.