Here come the wild cards

The cut-price credit war is a boon for borrowers who know a good deal

A new wave of competition for credit card borrowers has highlighted that millions of people could save up to pounds 100 or more a year by switching cards.

The potential beneficiaries are the 50 per cent or more of cardholders who don't pay their bill off in full every month and who consequently get stung with a collective monthly interest bill of pounds 170m. But the upsurge in competition should also serve as a reminder to check what sort of deal you're being offered.

People's Bank of Connecticut is the second US issuer to invade what it calls the "complacent" UK credit card market this year with a "no-frills", low-rate, no annual fee card. The card, offered in Visa or Mastercard form, carries an annual interest rate of 14.4 per cent. People who pay off their bill in full benefit from the standard interest-free credit period of up to 56 days between spending and paying.

People's Bank's move follows a tie-up between Royal Bank of Scotland and US card company Advanta to launch a low-cost card with an APR of 15.6 per cent, which is directly linked to the base rate - if the base rate falls so does the card's rate. It is believed to have attracted 50,000 users already.

For borrowers, both cards compare well with rates of 20 per cent-plus from many issuers.

Despite interest rates tumbling in recent years, those on many widely held credit cards have remained stubbornly high.

Barclaycard, with 9 million cards the biggest issuer in the UK, has an APR of 22.3 per cent and an annual fee of pounds 10.

The cost difference is illustrated by figures from Flemings/Save & Prosper, an existing issuer of low-cost cards. To borrow pounds 1,000 for a full year with Barclaycard at current rates would cost pounds 221 in interest, compared with pounds 144 from People's Bank and pounds 156 from RBS Advanta. Flemings' own Base Rate Card would charge just pounds 115, it says, although this card has no interest-free period. With this card you pay interest on each purchase from the date you bought. So it could work out poor value if you pay off your bill reasonably often when you get your statement. Occasional borrowers might be better off with a card offering both a low rate and an interest- free period.

Even if people don't transfer to the new breed of cards, the competition may well put pressure on established players to pare down their interest rates. But Barclaycard chief executive Bob Potts says that instead of specially reviewing its rates to fight off the newcomers, it will be looking to expand its range of discounts and incentives. It already offers Profiles points one for each pounds 10 spent - which can be cashed in for gifts, holidays and the like.

Barclaycard also offers borrowers who switch to it a cut in their debts of up to pounds 150, calculated on the basis of 5 per cent of the switched balance. There is nothing stopping you from paying off the rest of the debt immediately, although it is relying on the fact that because you were paying interest before, you will not be able to repay immediately after transferring.

With all such perks, you need to work out exactly what they would be worth to you. If you pay off your bill every month, consider whether sticking with the likes of Barclaycard for their bonus schemes - and paying (in this case) pounds 10 a year for the privilege is worth while when there are plenty of cards charging no fee and lower rates. Another option is to pick an affinity card - linked to a charity or other interest group. When you sign up, the issuer will normally make a donation of up to pounds 10 to the linked organisation. In addition, the interest group normally benefits from donations related to your spending - 25p for every pounds 100 spent is typical. .

As with non-affinity cards, some carry annual fees. And none offer the lowest rates. But competition is not necessarily passing them by. Midland recently cut its rate to 18.1 per cent on its range of affinity cards and increased its donation when you sign up to pounds 10.

You shold also be aware that any deal that seems attractive may cease to be in the future. A number of card issuers are offering specially reduced rates for an initial period and/or on debt transfers. Before you sign up, look to see what the rate might move to in the future and any conditions that will tie you in. Likewise, cards may have supplemenatry charges. The new People's Bank card, for example, has a pounds 10 flat penalty if your minimum payment is late or you overstep your credit limit.

A free copy of Moneyfacts, a monthly publication listing credit card and other borrowing rates (and savings rates) is available on 01692-500765.

How credit cards compare

Card Interest Annual Notes

rate (APR) fee (pounds )

Barclaycard 22.3 10 Profile points scheme

People's Bank 14.4 0 pounds 10 charge for late

payment

Fleming/S&P 11.5 0 No interest-free period

Base Rate Card

Fleming/S&P 14.0 12 -

RBS Advanta 15.6 0 Interest rate rises and falls with base rate

Bank of Scotland 22.3 7.50 Choice of 300 links Affinity Mastercard which benefit from varying donations. Annual fee waived if more than pounds 2,000 spent on card

Halifax Charity 20.8 12 Initial donation pounds 5 and Card 20p per pounds 100 spent

Midland Bank 18.1 0 Initial donation pounds 10 plus up to 25p per pounds 100 spent