Money Insider: Credit card battle fought on two fronts

Retail spending has become subdued in the current tough economic climate, but that hasn't stopped credit card companies from falling over each other as they try to persuade us to sign up for their new offerings.

During 2011 the battle for new card business has tended to focus on extended interest-free balance transfer deals, however recently we have seen more cards offering rewards or cashback.

In the balance transfer market Barclaycard raised the bar to a record level earlier in the summer with a staggering 24-month interest-free deal and along with Halifax it still offers the joint longest term of 22 months, although the Halifax card imposes a maximum transfer limit of £3,000.

Many other cards are offering 0 per cent for 16 months plus, which is evidence that the balance transfer model still works for lenders. They receive a 2.5 per cent to 3 per cent transfer fee up front, and then hope that customers fall into the trap of using the card for their day-to-day purchases too which immediately triggers a new stream of interest revenue.

Prior to the balance transfer craze, credit cards were viewed purely as a tool to help people manage their finances, particularly if they had unexpected expenses that they needed to cover prior to pay day.

A promotional balance transfer arrangement from your card company is simply a loan, and as such there is absolutely no need for you to have a card. But from the providers prospective they want you to carry the plastic around with you, and their pricing models have factored in that a certain number of customers will at some stage start to use their card for new spending.

Making purchases on your balance transfer card is a huge financial mistake and plays straight into the hands of the providers.

They know that customers who make purchases with their card will be liable for interest charges unless they repay their credit card bill (including balance transfer sum) in full – either way it's a win-win situation for the lender, but for the customer, it defeats the object of applying for the card in the first place.

If you are going to opt for a promotional balance transfer card, be smart and don't ruin the benefits of being able to borrow cheaply because of a lack of discipline.

Cut the card up when it arrives, divide the balance transferred by the number of free months and set up a direct debit to pay this amount every month. That way you'll only end up paying a relatively small one-off fee and will be able to make a significant improvement to your overall financial position.

If you need a card to help with your cash flow, then by all means carry a separate card but always aim to repay the monthly statement balance in full if at all possible.

Long-term balance transfer offers are only suited to a limited and probably a dwindling number of customers, which may be the reason that some providers are now paying greater attention to cards that come with cashback or rewards.

One of the most high profile launches comes courtesy of Santander with its new 123 Cashback Credit Card which is being launched on Monday 5 September. The card comes with a £24 annual fee, however for a regular user of plastic, it can still deliver a reasonable return. The cashback is paid monthly at a rate of 3 per cent on fuel spending (maximum £300 per month), 2 per cent on department store spend and 1 per cent on supermarket purchases.

Customers will need to weigh up the potential returns based upon their own spending pattern, however a £500 monthly supermarket bill and a £200 monthly fuel spend will generate £11 of cashback per month or a net £9 once you factor in the cost of the annual fee. The interest rate on the card is 18.9 per cent and as with all rewards based cards, if you don't pay the entire balance every month, the interest charges can easily wipe out any benefits earned.

As well as the recent launch of the AA Rewards Plus card I mentioned a couple of weeks ago, we have also seen a revamp of the Platinum Cashback card from American Express. The 5 per cent rebate on spend in the first three months has been cut to 2.5 per cent (still maximum £100) and now it comes with an annual fee of £25. On the plus side the representative APR has been reduced to 18.5 per cent and the card now plays a flat reward rate of 1.25 per cent on all spend.

It's still possible to benefit from these deals if you use your plastic wisely, but only for those with an excellent credit rating.

Andrew Hagger is an analyst at Moneynet.co.uk

PROMOTED VIDEO
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Life and Style
techCould new invention save millions in healthcare bills?
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    C#.NET Server Side Developer (C#, XML, WCF, Unit Testing,SQL)

    £30000 - £40000 per annum + benefits+bonus+package: Harrington Starr: C#.NET ...

    Junior Database developer (SQL, T-SQL, Excel, SSRS)

    £20000 - £30000 per annum + benefits+bonus+package: Harrington Starr: Junior D...

    Business Analyst - Banking - London - £550 - £650

    £550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...

    Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

    £55000 per annum: Harrington Starr: A financial software vendor at the forefro...

    Day In a Page

    All this talk of an ‘apocalyptic’ threat is simply childish

    Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

    Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
    Mafia Dons: is the Camorra in control of the Granite City?

    Mafia Dons: is the Camorra in control of the Granite City?

    So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Once the poor relation, the awards show now has the top stars and boasts the best drama
    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
    Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

    Radio 1’s new top ten

    The ‘vloggers’ signed up to find twentysomething audience
    David Abraham: Big ideas for the small screen

    David Abraham: Big ideas for the small screen

    A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
    Tim Howard: I’m an old dog. I don’t get too excited

    Tim Howard: I’m an old dog. I don’t get too excited

    The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
    Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

    Tom Peck on Match of the Day at 50

    The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition
    Air strikes? Talk of God? Obama is following the jihadists’ script

    Air strikes? Talk of God? Obama is following the jihadists’ script

    The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
    Ebola outbreak: Billy Graham’s son declares righteous war on the virus

    Billy Graham’s son declares righteous war on Ebola

    A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
    Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

    Not even Jeremy Clarkson is bigger than the BBC, says TV boss

    Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
    Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

    Nick Clegg the movie

    Channel 4 to air Coalition drama showing Lib Dem leader's rise
    Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

    Philip Larkin: What will survive of him?

    Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

    Waxing lyrical

    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
    Texas forensic astronomer finally pinpoints the exact birth of impressionism

    Revealed (to the minute)

    The precise time when impressionism was born