Banks have increased interest rates on millions of credit and debit cards even as the cost of borrowing plummeted to a 53-year low, it was reported last night.

Banks have increased interest rates on millions of credit and debit cards even as the cost of borrowing plummeted to a 53-year low, it was reported last night.

A study of 240 credit cards showed that while the Bank of England dramatically reduced its official bank rate from 5% in May to 3% this month, the cost of borrowing on cards had gone up.

The research by banking experts Defaqto showed that since May, the average annual percentage rate (APR) on cards rose by 0.4%, climbing from 17.2 to 17.6%.

Last week's decision from the Monetary Policy Committee (MPC) to cut rates by 1.5% to just 3% was the biggest change since March 1981.

The consumer website MoneyExpert.com found that rates on store cards had risen a full per cent in the last six months, making the average rate now 25%.

More than half of store cards are charging more than 27%, it said, with one type - Creation account cards which are used at a range of stores - charging 30.9% APR if customers do not pay by direct debit.

The news comes after it was revealed some homeowners could be enjoying an interest-free mortgage next year if rates continue to fall steeply, it was disclosed yesterday.

Cheltenham & Gloucester, which is part of Lloyds TSB, offered a two-year tracker mortgage of 1.01% below the Bank of England base rate in July and August 2007.

The deal means that if interest rates fall to 1%, as many economists predict, people who took out the loan will not have to pay any interest on their mortgage at all.

In August 2007 the Co-operative Bank was offering a two-year tracker at 0.61% below base rate. Nationwide also had one at 0.27% below base rate, although the group will stop reducing the rate if interest rates fall below 3%.