The latest Bank of England figures1 reveals that quoted household interest rates on consumer credit products continued to rise in August amid an economic environment of rising interest rates, mortgage rates and inflation. 

The analysis from Freedom Finance, one of the UK’s leading digital lending marketplaces, demonstrates the impact of the rising cost of borrowing on households and they urged consumers to shop around for credit using best practise. The warning comes as:

• Average credit card rates jumped a further 0.13 percentage points since July to hit 21.79% in August – the highest average monthly rate since December 1998 (22.19%).

• The average quoted rate for a £10k personal loan grew by 0.20 percentage points to 4.38% and is now at its highest level since December 2015 (4.45%). 

• The average rate for a £5k personal loan also ticked up by 0.12 percentage points to 8.41% in August and is at its highest level since March 2017 (9.54%). 

• Average overdraft rates spiked in April 2020 when new regulations were introduced but they have been consistently rising to new highs even since then. They stalled in August at 35.29%, the same rate as July, although this remains an all-time peak. 

The analysis comes after data from the ONS2 last week found that one in five adults (19%) reported they had to borrow more money or take out more credit in the past month compared to a year ago.

David Hendry, Chief Marketing Officer at Freedom Finance, commented: “The cost of borrowing across major consumer credit products continued to rise in August, as interest rates and inflation also increased.

“Credit card rates are now at their highest level in nearly 25 years, while personal loans are also at five- and seven-year peaks depending on the amount borrowed.

“As the cost of borrowing increases, it is vital that households ensure they are following best practise when shopping for loans.

“As a very first step, customers should be shopping around to explore the best rates and products that are available to them, not just accepting the first offer or one from their existing provider.

“Using the latest technologies such as soft searches and open banking can help with this because it will mean that they only see the products that they are eligible for without the fear of a declined application or damaging their credit score.

“Getting financial advice or guidance can further support consumer’s decision making and if people are struggling to make repayments they should contact their lender immediately as they are obliged to help.

“While the price cap announcement may have calmed immediate fears for the coming winter, it’s still likely to be a challenging period for our finances. The lending industry can play a positive role in helping people manage their money, but consumers must also do their bit to make the credit market work for them.”

The Freedom Finance five-point plan provides a helpful starting point for people thinking about how they should best manage their consumer credit commitments:

The Freedom Finance Five-Point Plan for Consumer Credit

1. Carry out an audit of existing debt to see what rates you are currently on and whether there are cheaper deals available. Check that you aren’t being stung by any hidden fees or charges and that you understand what your total payments will be instead of just taking the lowest monthly payment

2. Check your eligibility for benefits like Universal Credit, Jobseekers Allowance and Housing Benefit which may reduce your need for consumer credit

3. Use digital marketplaces and online services to shop around for the cheapest deals, using soft searches that don’t harm your credit score

4. Consolidate debt where possible to help you keep track of repayments more easily while moving debt to products with a cheaper rate 

5. Prioritise paying off your most expensive debt to try and move credit commitments onto cheaper rates or products