Cheaper credit cards ahead in rate-cut war

NThe prospect of cheaper interest rates for millions of credit card users came closer yesterday after Royal Bank of Scotland and Advanta, a large American operator, jointly launched a card which undercuts most of their competitors by up to 7 per cent.

The new card comes as a succession of base rate reductions in recent months has turned the spotlight firmly on interest rates charged for both mortgages and credit card purchases.

There are more than 28 million credit cards in the UK, with the market leaders, Barclaycard, TSB, NatWest and Midland, all charging at least 22 per cent APR. Base rates fell in December to 6.25 per cent.

Charges on the RBS Advanta Visa card are currently 15.9 per cent APR, compared to 22.6 per cent with Barclaycard. Someone borrowing pounds 2,000 for one year could save pounds 104 by switching from Barclaycard to the new card, RBS Advanta argued yesterday.

John Mullady, managing director, said: "High credit card rates in the UK affect millions of people. Over 70 per cent of credit card balances attract interest charges and the vast majority of card holders are getting a poor deal.

"For example, if all UK cardholders switched their interest rates to us, total interest payments would be reduced by pounds 500m a year."

However, his company's claim to have the cheapest card on the market was hotly disputed by other issuers, who pointed out that their cards were cheaper. Save & Prosper, a small niche issuer, already offers two cards with interest rates of 14.6 per cent and 11.8 per cent APR respectively.

Interest charges on the new RBS Advanta card are fixed at a certain rate, proportionally above bank base rates, currently 6.25 per cent, and either rise or fall if they do.

Mark Warde-Norbury, banking services manager at Save & Prosper, said: "One of the main factors affecting whether people switch from card issuer to another has been inertia. Hopefully, that is beginning to change. We are noticing much more interest in what we have to offer than a year or two ago."

Barclaycard hit back by arguing that unlike the new card, its 9 million users received a range of additional services, including loyalty points and free 100-day insurance on purchases. Its link with Ford has meant that more than 43,000 card holders have saved an average of pounds 1,000 on new car purchases.

Barclaycard also said that, unlike its card, RBS Advanta charges its borrowers a pounds 10 fee if they do not pay a minimum amount on what they owe within 15 days of the interest-free period. RBS also levies pounds 10 from those who exceed a pre-arranged limit by more than 10 per cent.

Barclaycard added: "Obviously, we keep our rates under constant review. We have seen competition increasing in the last five years. But we believe that the way we reward loyalty and treat our customers is a vital part of what we provide.

Credit card charges

Company APR (purchases) Interest-free period/fee

RBS (Mastercard) 14.5% none/nil

R Fleming/Save & Prosper 14.6% 56 days/pounds 12

RBS Advanta (Visa) 15.9% 56 days/nil

First Direct 19.5% 56 days/nil

GM Card 20.9% 52 days/nil

Lloyds Bank 22% 56 days/pounds 12

Barclaycard 22.6% 56 days/pounds 10

Midland 22.3% 56 days/pounds 12

NatWest 23.4% 56 days/pounds 12

Source: MoneyFacts