New plastic bullets in the lending wars

PHONEY war. That was my immediate reaction to the latest bit of financial services' price competition to bubble up - this time in credit cards.

Last week saw the launch of a new card by Royal Bank of Scotland in association with Advanta Corporation, a US credit card company. What distinguishes the RBS Advanta Visa card, it is claimed, is the combination of a relatively low interest rate of 15.9 per cent (APR) - which is linked to the base rate - with no annual fee but with the usual interest-free period. Other low-rate cards have fees or no interest-free period, while cards without fees normally carry interest of 20 per cent up. Worse still, most of the main cards have annual fees and high interest.

But for many sensible savers, the new card will do nothing. We're the people who pay off our bills at the end of every month - incurring no interest - using existing no-fee cards (such as those from the Co-operative Bank, which guarantees no-annual-fee for life).

For our sort, credit cards are nothing more than a convenience and effectively an interest-free loan - a good thing, so long as they don't turn you into a spend-aholic. Such people already cost the card companies money - some estimate that without interest, or a fee, the card companies only break even when we spend pounds 5,000 a year. But we know the rule of thumb that cards are expensive money - authorised overdrafts and personal loans being cheaper, and mortgage borrowing being the cheapest.

That hasn't stopped the other half of Britain's 20 million credit card holders, however. They're paying interest on credit card debts averaging perhaps pounds 800 each. In fact more than two-thirds of all borrowing on credit cards - some pounds 8bn - is clocking up interest. These 10 million could benefit by a total interest saving of pounds 500m a year by switching, claims RBS Advanta. And this sort of rate now makes the comparison with overdrafts and loans much more finely balanced. Even in phoney wars there are casualties, and things could get bloody very quickly.