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6 Nov 2017

Will the base rate rise hit your credit card bill?

Find out if loans, credit cards and overdrafts are likely to become more expensive

The Bank of England recently raisedinterest rates for the first time in a decade - but will this drive up the cost of your credit card, overdraft or personal loan?

On Wednesday, the Bank of England announced it was moving the base rate to 0.5%, up from the historic low of 0.25%.

Which? looks at the impact of the rate rise on borrowers of unsecured debt - namely, users of personal loans, overdrafts or credit cards.

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How the base rate impacts on borrowings

The base rate is the interest that commercial lenders pay when they borrow from the Bank of England - and the costs of this are often passed on to bank customers, either partially or in full.

While the last rate rise was in July 2007, a 0.25% increase isn't a huge change - and rates remain low compared to previous decades.

A rate rise could lead to higher borrowing costs for many people, especially those with mortgages. At the same time, savers may see slightly better rewards.

But historical trends suggest borrowers with unsecured debts are unlikely to see the costs of their debts soaring in the short term.

As the chart below shows, the base rate only has a limited impact on these types of debt. In fact, when the base rate tumbled over a decade ago, borrowing costs for all these products actually increased, rather than fell, according to Bank of England data.

Will credit card interest become more expensive?

The base rate has almost no influence on the rates charged by credit card companies, which have stubbornly stayed at around 18% for several years now. If anything, average APRs have been creeping up as the base rate has fallen.

But the interest paid by credit card borrowers is only partly related to the APR. Some people are paying much less for credit card debts, due to the rise of 0% balance transfer or purchase deals.

That's not to say that credit card companies couldn't start to increase the rates they charge - either by hiking up costs for long-standing customers, or making new deals less attractive.

Credit reporting company ClearScore says that some lenders started doing this ahead of the rate increase, with many providers reducing their interest free balance transfer offers from 43 months to 39 months.

But if you've recently taken out a credit card, don't be worried about a fee hike - card companies aren't allowed to increase their rates during the first 12 months of a deal, according to ClearScore. And if your credit card provider does boost your costs, you can always switch to a new deal elsewhere.

Are overdraft fees affected by the base rate?

As with credit cards, overdraft rates increased, rather than fell, when the base rate was slashed in 2008. The increase wasn't as much as with credit cards - though overdrafts tend to be a more expensive way to borrow than plastic, or personal loans.

The Bank of England only tracks the average rates for authorised overdrafts - meaning borrowers who exceed their limit could end up paying far more. In many cases, an unauthorised overdraft will cost you more than a payday loan.

Borrowers who regularly rack up charges on overdrafts could find themselves better off with a basic bank account, which won't allow you to withdraw money that's not in your account.

How are personal loans impacted?

Personal loans also became more expensive in the immediate aftermath of 2008 rate cut. But unlike credit cards and overdrafts, the costs did gradually come down again afterwards.

It's possible that rates will start to rise again now, but competition among lenders, as well as the small size of the increase, means there are unlikely to be drastic changes in the near term.

Personal loans are also normally agreed at a fixed interest rate - so any increase will only affect new customers. If you've already agreed a loan, the bank, building society or peer-to-peer lender should honour the rate it agreed with you at the time.

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? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited