Amex links card interest rates to the base rate – and cuts credit limit fee

Customers' interest rates are currently set by Amex, but from Tuesday 1 October there will be two parts to the rate for existing customers: a 'personal rate' and the base rate, which will be combined to make the interest rate that you could be charged on your card.

The base rate is the Bank of England's official borrowing rate, ie, what it charges other banks and lenders when they borrow money – and it influences what borrowers pay and savers earn. It is currently set at 0.75%.

Amex is also scrapping the £12 fee it charges customers who breach their credit limit.

New customers applying for a card will automatically have cards with the new interest rate rules and no over-limit fees.

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How is the interest rate changing?

Your 'personal rate' and the base rate will be combined to make up a simple rate of interest, which is what you'll pay. However, your APR will be slightly higher, as it is a compound rate (this just means that you could pay interest on interest if you keep a balance on the card).

For example, if your overall simple rate is set at 20.84%, this is made up of a personal rate of 20.09% and the base rate at 0.75%. Assuming a constant £1,000 balance, this would result in a £208.40 annual interest charge, under your simple rate of interest.

But if the base rate rises to 1%, you will pay 21.09%. Using the same example, interest would be £210.90 for the year. Though if the base rate rose to 5%, you'd pay £250.90.

The new interest system will apply to all transactions, including purchases and cash withdrawals, though if you're on a promotional 0% rate, this won't change.

It's worth noting that Amex reserves the right to change your 'personal rate' of interest too, so it's not just changes to base rate that could affect your rate. However, Amex says you would be given 30 days' notice of any changes that affect your 'personal rate'.

Will I pay more or less?

The first thing to say is that if you always pay your balance off in full every month and never bust your credit limit, these changes won't affect you at all, even if the base rate rises.

If you regularly go over your credit limit, then these changes mean you'll pay less.

And if you pay interest, things won't change in the short term, as the effective APR on these cards hasn't changed – the only change is how this rate is made up.

However, if base rate rises, then you will pay more. Your rate will increase from the day after your next statement date. Similarly, if the base rate falls, you'll pay less, and – again – your rate will fall from the day after your next statement date.

Can I reject the change?

Yes, you can. You have a right to opt out if a credit card provider changes the terms of your deal, though you'll need to contact Amex to reject the changes by Monday 30 September.

If you do reject the changes, you won't be able to use your card again and your account will be closed. If you have a balance to pay off, you can pay it off at your existing interest rate.

However, if you accept the changes now, and then your rate rises as a result of the base rate rising, you won't then be able to reject the hike.

Do any other lenders link credit card rates to the base rate?

It's still unusual in the credit card market for lenders to have this direct link to the base rate, but both Barclaycard and Lloyds Banking Group do this for some of their credit card customers.