Time to think about a change of credit card

Are you still paying sky-high interest rates as well as an annual fee? You probably don't need to.

Anyone who has a credit card, has ever had a credit card, or has any thought of getting a card in the forseeable future should set some time aside in the next few days and weeks to review their situation. Competition is at long last bringing interest rates down, and not a moment too soon for millions of cardholders whose enjoyment of their plastic cards has been tempered by the high-handed and arbitrary way in which most card companies have decided their interest rates.

We simply could not live without them. But the interest rates charged are always arbitrary, and not linked to any objective measure like base rates. Card companies are regularly accused of being quick to put rates up and slow to bring them down.

Credit card companies suffer their fair share of fraud and bad debts. But they charge both the retailers and the card-users for their services and the current rates users pay on standard cards issued by the clearing banks are roughly 1.62 per cent a month on unpaid balances, which compounds up to 22 per cent a year, at a time when inflation is under 3 per cent.

Interest is charged on unpaid balances from the date the transaction was posted until the next account is drawn up, which means accidentally missing a payment date is a very costly exercise indeed, incurring almost two months' interest on some items.

When so many users cottoned on to the extortionate costs of failing to pay bills on time and began doing so, the card companies responded by imposing annual charges to recoup some revenue. Standard charges are now pounds 10-12 a year regardless of how often the card is used or whether the balances incur interest charges or not.

Barclaycard/Visa and Access/Mastercard no longer have a duopoly. Over the years a number of rivals, including Co-operative Bank, Bank of Scotland, Save & Prosper/ Robert Fleming, American Express, Beneficial Bank, and the Halifax , Bradford & Bingley and Newcastle building societies, have entered the market offering lower interest rates on unpaid balances and/or no annual fees. Most of these use the clearing services of Visa and Mastercard, which also guarantees them wide acceptability on a par with the market leaders.

A large number of charities and special interests have also set up affinity cards which offer a full range of card services under the Visa or Mastercard banner and cream off a small proportion of the profits to good causes. Barclaycard hit back with Profile points and Natwest with Airmiles in an attempt to protect their market share and encourage cardholders to concentrate card usage on their established cards.

Most card providers now offer a cheap introductory interest rate on balances transferred from another provider. Last year Co-operative Bank introduced a two-tier structure for its gold cards, offering a choice of a large fee and low interest for persistent borrowers and a no-fee card with higher interest for those who usually pay off in full.

Last month Royal Bank of Scotland teamed up with Advanta, one of the big wheels in credit cards in the US, to launch a card charging interest linked to base rates (and currently 15.6 per cent). A few days ago Petplan, the specialist provider of insurance for pets announced a fee-free card charging a competitive 18.9 per cent on unpaid balances. American Express responded by cutting its standard rate to 16.7 per cent for anyone who spends pounds 1,000 a year and makes at least the minimum payment off their monthly balance. New recruits are offered an even sweeter 13.1 per cent rate until the end of 1996.

Next week People's Bank, another market leader in the US credit card business, is due to launch a new product in the UK and there are no prizes for guessing what it will be, or that it will undercut the market leaders even further.