New credit card promises exciting extras – but paying on plastic can be a costly mistake
Saturday 11 July 2009
The battle to encourage people to switch credit cards takes a new turn next week when Egg relaunches its premium plastic card with better rewards and benefits. The main attraction of the new Egg Money World MasterCard is 1 per cent cashback on all transactions. The main disadvantage is a hefty £1 a month charge for the privilege.
If it's successful it could lead to fee-charging credit cards becoming the norm – adding to the cost of borrowing when people can ill afford extra cash drains from their account. David Black, banking consultant at Defaqto, is convinced that is what lenders want. "I'm in little doubt that card providers would like to move to the situation where monthly or annual fees become the norm in the UK credit card market," he says.
Most credit cards don't charge an obligatory fee – just 7.3 per cent of them charge a fee ranging from £12 (annually) for the new Egg card to a massive £300 for the upmarket Citi Ultima card. The lenders point to the benefits offered on the cards and claim that cardholders are getting a bargain for their money. They would like to squash the millions of dormant cards in existence which cost them money to maintain – figures from the credit card industry reveal that, on average, people have 2.4 credit cards each.
"The vast majority of people are not used to paying an obligatory fee for having a credit card and there will undoubtedly be significant resistance to doing so," says Mr Black. "It is also apparent that many people have several credit cards and there is no pleasure for the card issuer in being the provider of a dormant credit card. From Egg's point of view the monthly fee will ensure that there is at least one transaction – the £1 fee – each month, and this should keep the card in the holder's attention, while the ability to negate the fee by spending at least £100 every month may well provide the necessary incentive for the user to make Egg their primary card."
In other words, paying the fee could mean being better off – for some borrowers. If you already use credit cards then you should of course consider new options, especially if they could improve your financial condition. But simply flashing the plastic without thinking through the cost is a recipe for debt disaster. According to the money education charity Credit Action, the average Briton now owes £4,860 on credit cards, overdrafts and loans. Include mortgages in the debt figure and it soars to £30,480 that each adult owes .
So it's easy to presume that companies encouraging people to get further into debt are setting themselves up to be criticised. However, few reputable lenders are keen to add to their loan book after many chalked up massive losses through bad debts in the last 18 months or so.
Against that background it is clear that Egg is trying to attract regular credit card users from its rivals, rather than encourage new ones. Indeed, the bank proved its prudence more than a year ago – in February 2008 – when it stopped the accounts of some 160,000 'risky' customers. This suggests you will need a spotless credit record to be accepted for the new card when it becomes available on Tuesday next week.
The internet bank says the new card is a response to customer demand. Bert Pijls, chief executive officer, says: "We wanted to create a card that gives people real value. So we reviewed the market, matched it against what certain customers want, and created one standalone card. Egg Money is for people who want to earn cashback from either everyday spending or expensive purchases and be protected at the same time. It is also for customers who want certainty in their transfer rate so they can take more control of their finances while being rewarded for any new purchases."
Is it worth applying for the card, bearing in mind the risk that being turned down could hit your credit record, making it harder to be accepted for a loan in the future? It depends on what kind of credit card user you are. David Black says: "Egg has stacked up some fairly impressive features to encourage people to sign up to their new card. The 1 per cent cashback reward means that spending of £100 each month on the card would cover the monthly fee."
However, if you don't pay off the balance in full every month, then the interest charged on the outstanding balance is less competitive. Peter Harrison, credit card expert at moneysupermarket.com, said: "The card offers a competitive life of balance transfer deal at 8.9 per cent, but new purchases incur a hefty 16.9 per cent typical APR unless the balance is cleared in full each month."
Other benefits on the new card include the usual purchase protection, and a range of discounts at selected online retailers. But Egg has also introduced a "price promise" which could make using the card more worthwhile, especially for bigger ticket items. If you buy something with the card costing more than £50 anywhere in the UK and then find it cheaper locally – which means within a 30-mile radius – within 30 days, Egg says it will refund the difference.
On top of that, it's also offering event cover. It says it will refund the money spent on tickets costing more than £20 bought with the card for events that you can't attend, up to £100. Another new benefit, already offered by the likes of the retailer John Lewis, is extended warranties on electrical items. You'll get 12 months' additional warranty for any item costing more than £50 once the manufacturer's warranty expires.
There's also a 0 per cent balance transfer offering, which is pretty standard across the credit card market, says Black. "0 per cent balance transfers are widely available to new customers. In fact 67.7 per cent of available credit cards offer 0 per cent introductory balance transfers." The key with balance transfers is to check the fee, which can be hefty. Egg charges 3 per cent, for instance, while the average balance transfer fee is 2.83 per cent, according to Black.
Mr Harrison points out that many lenders are withdrawing from the balance transfer market. "Egg's move is indicative of a changing market," he says. "There are now much fewer providers in the balance transfer space. For example, Capital One has withdrawn from the 0 per cent balance transfer market, RBS (which operates the NatWest and Mint brands) now only offers 0 per cent balance transfer deals to existing customers, and Tesco has reduced its 0 per cent balance transfer offer.
"Further consolidation with the market might very well lead to less competition, and time will tell if Santander and Lloyds will put the same sort of balance transfer exclusions on their products as MBNA and their associated brands. Lenders are also sharing more information with each other, and this could further decrease the number of people being accepted for the best balance transfer deals."
There is still plenty of competition around, but borrowers need to be more vigilant to ensure they get the right deal to suit their spending and uses of plastic. Check our best buy tables on page 52 for the current best deals.
"If you want to do a balance transfer, get the card with the best balance transfer deal," says Ed Bowsher of lovemoney.com. "If the card is for purchases, then you should either go for a cashback card or a card that offers 0 per cent on purchases such as Tesco's Clubcard MasterCard."
Andrew Hagger at Moneynet.co.uk says anyone attracted by the cashback offered by the new Egg card should consider the American Express Platinum Card instead. "It doesn't have a fee and pays an introductory 5 per cent cashback (up to £100) in the first three months," he says. The card then pays 0.5 per cent on the first £3,500, 1 per cent to £10,000 and 1.5 per cent above that.
"However, there are some retailers that don't accept Amex, so if you're purely looking for a card to give you cashback, then at 1 per cent the Egg deal is worth a look, as most cashback cards only offer 0.5 per cent."
He has calculated that you'd need to spend an average £1,670 per month on the card to claim the maximum £200 cashback available. "The 8.9 per cent balance transfer for life can be beaten by Barclaycard Simplicity's 6.8 per cent for life or Leeds Building Society at 5.9 per cent for life, plus there are plenty of 0 per cent deals around, with Virgin Money offering interest-free for 16 months and Santander for 15 months," he adds.
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