Credit cards bills are set to soar by an extra £1,800 a year over the next four years as the cost of borrowing goes up.
The financial world is holding its breath waiting for the Bank of England to started gearing interest rates up to fight inflation – and when they do start rising, millions will face paying more for mortgages and credit cards.
Cash-strapped families are already hard-pressed by the VAT rate hike and the threat of government spending cuts and demands for more tax, and interest rates rises could push many over the brink in to insolvency predicts a report from global accountants PWC.
The report reckons interest rates on credit cards and loans are expected to increase by 2% to 3% by 2015.
Interest rate rises will bludgeon 30 million credit card holders and 8 million mortgage payers who will have to find hundreds of pounds a month from stretched finances to pay their way.
“Consumer confidence is still weak. In fact, some 40% of respondents still expect their pay to be reduced or frozen in the coming year. Consequently, households are seeking to reduce the amount that they borrow,” said Richard Thompson, partner at PWC.
Payday lenders and pawnbrokers see business boom
“These worries are driving consumers back to ‘jam jarring’, whereby they shun large loans and open ended credit cards in favour of smaller, shorter term borrowing for a particular purchase, in an effort to control their borrowing.”
Jam-jar lenders include payday loans and pawnbrokers, who are experiencing a boom in business while borrowers are trying to bring down credit card balances to keep control of their incomes.
Last year, the average credit card balance dropped by £500 per card as borrowers paid money in instead of spending on plastic.
‘There is strong evidence that the type of credit demanded by consumers is changing,” says the PWC report.
“Point of sale finance products, payday loans, home credit providers and pawnbrokers will all play their part in providing for these kinds of consumers, but the cost of credit needs simpler explanation for consumers.
“A great deal of progress has been made by lenders in improving the transparency of products, but consumers themselves need to ensure they understand what they are signing up for.”