Burn your credit cards or Scrooge at the bank will snaffle your cash

A Bank of England report has confirmed that banks are boosting their profit margins by hiking up the interest rates on credit cards and personal loans.

In fact the Bank's report shows that while the rate it charges banks was slashed to 0.5% from 5% the interest rate banks are charging  on personal loans and credit cards has risen to around 11% from 8.5%.

The average rate charged on mortgages has fallen in the past two years but less than the fall in the official interest rate, to just under 4% from around 6%

The banks have been criticised for not lending enough and for charging higher rates to customers but have repeatedly said they have little choice as the higher rates they charge reflects the higher costs they have to pay in the wholesale markets.

The Bank of England report does say there is some truth to that saying wholesale lenders ‘appear to continue to demand significantly greater compensation than previously.’

Banks replace lost loan protection profits

But the Bank also said that is only part of the picture. It said banks had been charging higher rates to replace profits lost when the Financial Services Authority banned them flogging single premium payment protection insurance (PPI).

‘In light of the loss of income from PPI, lenders started to rebuild the mark-up on unsecured lending,’ the report found.

But it also said ‘lenders’ net interest margins – the difference between what they pay savers and charge borrowers – have come under pressure because of the historically low base rate. Their response has been ‘to raise the mark-up on new lending.’

The Bank's findings echo what the big banks – including at state-owned RBS and Lloyds – said when they reported higher profits for the first half of the year.

Lloyds has said it hopes to lift its net interest margin even more over the coming months ahead. Analysts have no doubt that both banks can build on their recent improvements in this area.

Looking at the analysis of the Bank of England there seem more reasons to believe interest rates on credit cards and personal loans could continue to rise in the months and years ahead.

The report said one of the factors banks take into account when thinking about how much they charge is the likelihood that they won’t get their money back. That is dependent on how many loans have gone bad but also on economic factors such as the outlook for unemployment – something many believe will begin to rise again in 2011 as the government’s cutbacks take effect.