PAYPAL is making a huge change to fees within weeks and shoppers won’t be happy.
The global payment platform will charge the average customer more interest for every £500 borrowed through PayPal Credit.
PayPal is upping the interest rate charged to borrowers who use PayPal CreditRex
Like a credit card, PayPal Credit offers users the chance to borrow money for their purchases when they checkout online.
Customers get a monthly statement and are required to make a minimum payment towards their balance each month.
Unlike PayPal’s Pay in 3 buy now, pay later option, PayPal credit is not usually interest-free and customers have to undergo a hard credit check to be accepted.
The interest rate that a customer is charged is based on their credit score.
These are currently 21.9%, 25.9% and 29.9%. But PayPal is raising the lowest rate of interest charged from 21.9% to 23.9% APR.
Moving to this higher rate will mean that customers will pay 69p more per month for every £500 borrowed.
And if you’ve borrowed £1,000 you’ll pay £1.39 more per month.
The payments giant has been contacting existing customers to notify them of this change.
At the same time, it has been reviewing the rates offered to all existing customers.
This could mean that you’re moved to a lower or higher interest rate depending on your circumstances.
A PayPal spokesperson said: “The change is in response to an increase in the underlying costs of us providing PayPal Credit to our customers.
“We encourage customers to contact us with any questions or concerns the change could impact on their current financial situation.”
But Sara Williams, founder of Debt Camel, has said that existing customers can opt of this interest rate hike.
She said: “As this is a change to the terms and conditions of your account, Financial Conduct Authority (FCA) say that Paypal has to allow you to stay on the old interest rate if you close the account.
“And choosing to close your account and carry on paying it off at the old interest rate will not hurt your credit score.
“So this is a sensible option for you to avoid paying the higher interest rate.”
You’ll need to do this before September 1, when the interest rates for affected customers are upped.
But if you do close your account, you won’t be able open a new one with the same details again.
All new customers will be offered a higher rate of interest when borrowing through PayPal Credit from August 1.
It comes at the same time that other lenders have continued to pass on higher borrowing costs after the Bank of England increased its base rate by 0.5 percentage points in June from 4.5% to 5%.
What are the alternatives?
Before using PayPal credit, think about your options — and find the cheapest way to borrow.
If you already have a no-interest credit card or overdraft, consider whether this is the best way for you to spend.
You’ll also get Section 75 refund protection if you borrow through a credit card instead – something which isn’t offered to those who use PayPal Credit.
Another option, which might suit those with low scores, is using a credit union, whose rates are capped at 42.6%.
But remember it’s always vital to ask yourself if you actually need to borrow before committing to a new credit card, personal loan or overdraft.
If you cannot afford to pay off a debt you currently have, then you should avoid taking out any more debt at all costs.
If you do need to borrow but wish to reduce your costs, there are a number of ways to improve your credit score.
Boost your credit score
Getting on the electoral register is a must when it comes to building a decent credit score.
This proves who you are and where you live meaning it’s easier to get credit if you’re on the list.
It is also wise to check the electoral roll for any errors. You can sign up by registering to vote.
Don’t make too many credit applications as it can be seen as a sign of financial distress – and each application will be recorded on your file.
Use a “soft-search” eligibility calculator to show how likely you are to be accepted.
Always pay your bills as late payments are also recorded in your file.
Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.
The best credit card deals – with the lowest rates, biggest limits, cheapest fees and longest interest-free windows – are reserved for those with top-notch credit scores.
Lighten your loans
If you took out a loan a couple of years ago, it may be worth searching for a better deal.
Using a new loan at a lower rate to pay off an old one can sometimes make sense.
But remember, not everyone gets the rates advertised by lenders, as these are reserved for those with good credit ratings.
Check which loans you’re most likely to get without damaging your score by using an eligibility tool such as the one on Compare The Market or MoneySavingExpert.com.
Blitz your credit card balance
Do not let credit card debt linger. If you’re just paying the minimum each month, it could take decades to clear.
Only making the average 2.5% minimum monthly payment on a £5,000 balance means it would take you nearly 38 years to pay back and cost nearly £15,000 in total, on an interest rate of 22%.
Switch to a balance transfer credit card to get a window of up to 34 months with no interest charged.
Break the total debt down into monthly payments and set up a direct debit to ensure you wipe the balance in that time.
If that’s impossible, try to switch again to a new card.
But not everyone can get the top balance transfer deals, as they require an excellent credit score.
Find out which cards you’re most likely to get with the eligibility checkers on Go Compare or Uswitch.