The online bank and credit card provider, Egg has announced that it will raise the interest rate on their cards. The company is said to have written to around half a million of its customers to let them know the rate on their cards will rise by five per cent.

This means that around 20 per cent of Egg’s customers will have to pay APR of 26.9 per cent. However, stores cards have shown an even greater rise in APR to around 30 per cent.

The level of credit the company provides will be dependent on the rate of interest that is set. The Bank of England (BoE) has recently lowered the interest rate to an all time low of one per cent, the lowest ever since the bank was founded, more than three centuries ago.

No obligation to follow base rate cuts

However, companies are not obliged to follow the rate cuts, and Egg’s choice to do so is at their discretion.

According to BoE figures, purchases made on credit cards have risen by an average of 0.84 per cent, raising the overall average to 16.05 per cent. The average rate on cash advances is now 25.29 per cent.

An industry expert spoke of his amazement and concern at the behaviour of credit card providers, raising their interest rates, despite the BoE lowering the base rate and the negative effects coming from the economic downturn, recession and credit crunch.

He added that credit card firms should stop increasing their rates, but be looking to lower the rates for their loyal customers.

However, Egg has previous lowered the interest rate that was charged on the cash advances, by two per cent.

Other credit card providers may not be likely to do the same as it can jeopardise the customers that are with them. The customers may choose to switch accounts, in the aim of chasing the lower rates.

Other firms won’t follow in Eggs footsteps

Marks & Spencer Money has cut its interest rate, while Barclaycard has announced that it will be keeping the rate of interest on their cards the same.

The card provider said that it will keep interest rates frozen for four months, to help UK customers that are struggling with their repayments. Around three million customers with a low-risk profile will also have their interest rate cut by between 2.5 per cent and five per cent.

Antony Jenkins, the chief executive of Barclaycard, stated that the firm saw 2009 as a “difficult year” for a large number of people and they wanted to do all they could, to help their customers Barclaycard's customers.

In some cases, customers' credit limit will be lowered, while the firm has pledged not to contact customers for up to two months for payment if they are "actively working with the free money advice sector to sort out their financial difficulties".

As Egg has chosen to raise the interest on its cards, consumers may choose to lower how much money they use on spending, in the effort of saving their money. Also as many other credit cards now offer 0 per cent interest rate on their cards, Egg customers may decide to transfer their accounts to these credit card providers.

Personal loans to pay off debt

There has been a recent trend in the number of people putting a majority of their expenditure on credit cards. From rent and mortgage repayments to insurance and shopping trips.

Studies from the Barclaycard Payment Acceptance found that, its retailer customers recorded more than 11.5 million payments on Christmas Eve, with as many as 387 payments per second happening around lunchtime.

In addition, a 4.7 per cent increase in the value of average transactions was noted in December 2008, than in comparison to the previous year.

Antony Jenkins said: "Shoppers continued buying their Christmas presents right up to Christmas Day, with over eleven and a half million transactions on Christmas Eve alone. We have also seen a significant increase in post-Christmas shopping versus December 2007 as the sales have continued."

In these instances of increased expenditure, credit card holders will have mounting debt that they need to take care of. Some may feel the need to resort to personal loans, so that they can cover their repayments.

The credit rating firm, Fitch Ratings revealed that there was a 50 per cent point rise in delinquency rates on its credit card-backed bonds in the final three months of last year. This means that many people were failing to make their regular credit card payments.

Steven Webber, associate director at Fitch's European Structured Finance group, said: "Although the increased delinquencies have been expected in the current difficult economic environment, the magnitude and speed of deterioration, together with these latest increases in the IVA and bankruptcy filings are concerning trends."

He added that his company believe things will get worse before they get better.