How to secure the most competitive credit card deal as cost of borrowing reaches record high

The cost of borrowing on credit cards has increased to a record high of 26.0% APR, but interest-free deals have become more competitive, making it vital that borrowers hunt around to ensure they get the best credit card deal.

Research, due to be published in the Moneyfacts UK Unsecured Lending Trends Treasury Report, found that in September the average purchase APR (including fees) increased month-on-month from 25.9% to 26.0%, meanwhile last year the average APR stood at 25.2%.

A combination of factors has resulted in the record rise in average APR as Rachel Springall, finance expert at Moneyfactscompare.co.uk, explained: “A selection of low-rate credit cards worsened, some higher-than-average rate cards were launched, and other lower-than-average rate cards were withdrawn. In June, NatWest, RBS and Ulster Bank increased their 9.9% APR purchase rates to 12.9% and TSB increased its own from 7.9% APR to 9.9% APR. As it stands, there are only now cards available from Lloyds Banking Group, Tesco Bank and TSB that charge a purchase rate of 9.9% APR within the entire credit cards market.”

Although the cost of borrowing on credit cards has increased, interest-free deals have become more competitive this month. Moneyfacts research found that the average number of interest-free days on 0% purchase credit card deals has increased year-on-year from 280 in September 2020 to 316 this month, however it has fallen by two days between August and September. Meanwhile, the number of 0% purchase credit card deals has risen from 53 in September 2020 to 59 in September 2021, and increased by one deal month-on-month.

“Shoppers who decide to spread the cost of their spend on a credit card and apply for a 0% purchase offer will find deals have improved over the past quarter, with the most notable lengthening of terms to 20, 21 and 22 months interest-free,” revealed Springall. “In August, Tesco Bank increased its 0% purchase term from 20 months to a market-leading term of 22 months on its Clubcard Credit Card Purchases Mastercard and Barclaycard raised its 20-month 0% introductory purchase offer to 21 months on its Platinum All-Rounder Visa.”

As such, as we move into the festive season, shoppers looking to cover some of the cost of Christmas with a credit card and who cannot pay off the full amount each month, will likely find it more cost effective to use a 0% purchase credit card compared to a credit card without an interest-free offer on purchases.

Meanwhile, borrowers already with credit card debt may want to consider moving their debt onto a 0% balance transfer credit card. Not only has the number of interest-free days on balance transfers increased year-on-year, up from 529 to 548 this month, as well as by two days between August and September, but the average balance transfer fee has fallen from 2.28% in September 2020 to 2.10% this month, down from 2.13% in August 2021. Meaning it is now not only cheaper on average to transfer credit card debt to a 0% balance credit card, but borrowers have a longer interest-free period in which to repay the debt.