Debt Management and Your Credit Score

Banks are Cashing in on Your Credit Card & Overdraft Debt

Do you have a credit card? The read more to learn about how lenders are cashing in on your debt

Gradient blue Graphic explaining how banks are cashing in on consumer debt with Suits Me logo

With APR levels hitting a record high earlier this year, despite a record low base rate, banks are desperately trying to squeeze as much from their borrowers as they can – and it’s people with poor credit histories, who are unable to borrow money from mainstream banks who are the worst affected.

Banks generally generate income by cashing in on the interest rates attached to credit cards and other financial products they offer. Although customers can avoid any charges by simply paying off their balance each month, it’s not always an option for everybody.

According to The Money Charity, at the end of July 2020, there was roughly £207.9 billion outstanding consumer debt, including £62.3 billion of credit card debt, which is set to increase over the course of the pandemic. So, how are banks cashing in on our credit card and overdraft needs?

Subprime Credit Cards

These types of credit cards are tailored towards individuals who generally don’t pass credit checks with more traditional lenders. Cards such as Aqua and Vanquis are examples of subprime credit cards who give people with a poor credit history access to a lending facility – but it comes at a cost.

With these types of cards, the interest rates can be more than double than other credit cards aimed at people with better credit. People who have good credit will typically be able to get a credit card with an APR of around 13% (but this can be lower), compared to the 25.5% for people with poorer credit scores.

APR stands for Annual Percentage Rate, which takes into account the interest rate and additional charges that come with the credit card and will be paid back over the course of a year. For example, if you used a credit card with an APR of 24%, you would pay back the roughly 2% a month of the balance you owe.

Overdraft Rates Determined by Credit Score

When Monzo and other banking providers introduced their updated overdraft facilities in April 2020, they explained that they would base their overdraft interest rates on their customers credit scores, offering 19%, 29% or 39% EAR (variable) rates.

EAR (variable) rates are the level of interest you would pay if you’re overdrawn for the whole year. The variable part means that they can change these rates if they so wish. This basically implies that if you have a bad score and you’re stuck in your overdraft you will pay 39% interest over the course of the year that someone who has a better credit history.

To put this into perspective, if you had a £1000 overdraft at a rate of 39% APR and paid off your balance after 31 days, you would incur a cost of £28.36. Now, if you borrowed the same amount for the same length of time but at an APR of 19% you would only pay back £14.88.

This leaves people who suffer from poor credit forking out more money each year, potentially increasing the financial divide between some credit users.

Is it Possible to Avoid Credit Card Debt?

Credit cards are certainly big money makers for banks and other lenders. However, for consumers (especially consumers with a poor credit record) the interest rates on credit cards can catch some people out.

If you only make the minimum payments on a credit card, you will not be able to get out of debt as you’re only paying off the interest and not the actual money you owe. This can be tricky for many, as introductory offers and reduced rates tend to come to an end after a few months which opens up the door to other charges if the balance hasn’t been paid off.

The only way to avoid any charges, fees or late payments when using your credit card is to pay the balance off in full each month and regularly shopping around for new cards when the offer you got when opening the account comes to an end. 

Related Posts

It’s easy to open a
Suits Me account

Suits Me Debit Card 1

Choose an account to open

Let's figure out the best account for you

2

Just 10 Mins and a selfie to open your account

All we need is your completed application and your ID to get you up and running

Suits Me Debit Card 3

3 Ways to manage your finances

A free contactless Mastercard® debit card and access to online and mobile banking