Cheap credit comes with a catch

New offers abound on cards. But look out for the small print, advises Dido Sandler
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The Independent Online
A new generation of credit cards has sent the market spinning, with unheard-of low interest rates - some just a few points above the base rate of 6.25 per cent.

Many are backed by special deals to persuade people to transfer to a new account.

Last week Abbey National became the latest to join in the card price war, slashing its Visa rate to 17.9 per cent. It joins Save & Prosper, Royal Bank of Scotland Advanta, the Co-operative Bank and other low-cost operators.

People considering switching their credit card account should, however, read the small print. "There's always a twist somewhere," said a spokeswoman from MoneyFacts, a monthly magazine with all the best savings and loan rates.

Despite claims by the newer players, RBS Advanta, Save & Prosper and MBNA, that their interest rates beat the high street banks, they use more punitive ways of charging interest.

The new card issuers impose interest on all new purchases as soon as they reach the account whenever there is an outstanding overdue balance. The high street banks, meanwhile, allow the same credit period as usual - maximum 56 days. This difference could cost high-spending customers hundreds of pounds.

One MBNA customer, Roz Matthews, only discovered this when she received her statement. "I don't usually go overdue. When I found an extra pounds 7.05 interest charge, I couldn't understand it. Then I read the terms and conditions on the back of the statement, and found they were actually within their rights," she said. "I paid off the balance, and cut up the card."

Headline interest rates, expressed in terms of annual percentage rate (APR), can also be misleading, because they do not take into account the interest-free period available to many card users.

Although the Save & Prosper Base Rate Card's APR of 11.8 per cent undercuts the high street rates by roughly half, it has no interest-free period. The RBS Mastercard, at 14.5 per cent, also incurs interest immediately.

People should also look out for rate changes after any initial cheap offer. Cheap rates on Beneficial Bank's Sky TV card, charging 13.9 per cent, expire on 23 May. Beneficial's card for National Counties Building Society, charging 14.9 per cent, runs out on 23 July. MoneyFacts says there is no indication what the level of interest will be after those dates.

Lloyds Bank, meanwhile, pulls customers in with a starter rate of 16.2 per cent for six months. However, it will only maintain this low rate if users run up debts of pounds 2,000. Otherwise, interest leaps up to 21.1 per cent APR for debts of pounds 1,000 to pounds 2,000 or 22.4 per cent for under pounds 1,000.

People should also watch out for annual fees. Cards such as Alliance & Leicester's Atlantic Visa are free only for the first year. Bank of Scotland says it levies no annual charges, but that is only if customers spend pounds 1,500 a year. Halifax does the same but the threshold is pounds 2,000.

Some cards incur extra charges. RBS/Advanta, for example, charges customers pounds 10 if minimum payment arrives more than 15 days late, and another pounds 10 if you exceed your credit limit by more than 10 per cent.

Some low-interest companies make further charges for replacement cards, duplicate statements and sales slips, changing the date of the monthly statement and bounced cheques.

Nevertheless, certain new cheap cards may remain attractive even after the hidden extras.

The question then becomes whether they will accept you. Credit scoring systems can be rigorous. In a recent well-publicised case, MBNA launched a card targeted specifically at independent financial advisers, only to turn 60 per cent of them down.

The competitive 10.8 per cent offered by the Co-op's Gold Base Rate Card is available to those with minimum pounds 20,000 income, but with a stonking pounds 120 annual fee. RBS/Advanta, at 15.9 per cent, insists on a wage of pounds 10,000 or over. Pensioners are excluded.

Of course, if you belong to the 50 per cent who use their card as a source of free credit, and pay off their bill on time every month, interest rates are not so important, but you should choose a card with no annual fee.

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