Play your cards right

By Sarah Modlock

19 October 2005

There used to be an embarrassment of riches when it came to great credit card deals. We couldn't move for tantalising offers from card issuers, slashing interest and boosting perks. Now instead of a treasure trove, we have a pick and mix. So it's time to get tough on lazy plastic.

In a blast from the past, the introduction of annual fees is one of a number of ploys being used by card companies to boost income and squeeze customers. These include raising interest rates, reducing interest-free deals and imposing higher penalty charges for late payments and broken credit limits.

Of the 72.4million credit cards currently in circulation in Britain, fewer than 5% impose an annual fee. These tend to be 'premium' cards which offer other services as part of the credit package.

Now 40,000 customers of MBNA are being urged to cut up their cards and cancel their accounts in protest when the firm imposes annual fees of up to £25 from next month. Andrew Hagger from financial analyst Moneyfacts describes the move as 'pretty astounding'. 'With the Office of Fair Trading already clamping down on card providers and their excessive penalty fees, you would have thought MBNA would keep its head down rather than introduce yet more charges,' he says. 'I fully expect others to follow MBNA. This is pure greed.'

MBNA's describes the fee as a 'business decision', claiming 'It is between us and our customers'. Well, that explains everything.

Meanwhile, Barclaycard is to raise its standard APR from 13.9% to 14.9% from 14 November. Customers deemed to be a higher credit risk can expect a rate of around 27.9%. Ouch. They say that increased levels of risk and bad debt are behind the planned increases.

Last year Barclaycard imposed a 'balance transfer fee' where you pay a one-off percentage of the balance you are moving, and many lenders have followed. Abbey, Tesco, Sainsbury, Halifax One, Mint, MBNA and Egg all offer 0% interest deals but can charge up to £50 when you move your debt from a rival card. Nick White of price comparison service uSwitch.com believes that fee-free transfers will be scarce by the end of year. 'People who want to avoid a fee would be wise to snap up a deal now,' he says.

Some lenders are reducing or even scrapping the interest-free period on purchases. On average, customers have 53 days to clear a debt before interest is charged, but Co-operative, Nationwide, Smile and Cahoot, part of Abbey, have all introduced interest-free periods of 45 or 46 days. More drastically, a number of lenders, such as Lloyds TSB, Halifax and Bank of Scotland, have stopped the interest-free period altogether on some cards so customers are charged interest immediately on any purchases, although their interest rates are often lower than competitors.

Some commentators believe that card companies are effectively punishing consumers after being ordered by the Office of Fair Trading to end a rip-off in another area of their business. The OFT ruled recently that handling charges imposed on retailers to approve credit card sales are both unfair and too high. Charges of around £1billion a year have been passed on to customers through higher bills.

Card tricks

If you're looking for new plastic, there are still good offers around.

Moneyfacts rates the Nationwide building society classic and gold cards. They say that if you are the type of consumer that only wants one credit card, then this one currently takes some beating. There is an introductory deal of 4.9% APR for 12 months on balance transfers, no balance transfer fee (this is becoming much less common), 0% APR on purchases for the first 9 months, repayments are applied to the most expensive debt first (most card providers pay off cheapest first) and very unusually no commission charged for using the card abroad (most card issuers charge 2.65%+ for foreign transactions).

For 0% balance transfers, Halifax One has the longest period of 12 months. But you will need to pay a balance transfer fee of up to £50. The standard interest rate is 12.9% but interest is charged from the date of purchase on any balance not paid off each month.

Capital One's No Hassle card charges 6.9% APR, making it one of the cheapest standard rates around at the moment. Interest is charged from the date of purchase on any balance not paid off each month.

If you are one of the 40% of cardholders who pay off their bill in full each month then you'd be crazy to miss out on cashback. For every pound you spend, the credit card issuer will give you some money back, usually after 12 months. But remember, if you pay your bill late or carry some credit even for one month then you may find that the value of the cashback is far outweighed by the cost of interest.

Money-saving expert Martin Lewis highlights American Express (Amex) card offers, though they are not universally accepted, because of higher operating fees for retailers. He says best practice is to have an Amex and non-Amex as back-up. American Express Platinum cashback is tiered but spend more than £7,500 and it pays 2%.

The American Express Blue pays 0.5% cashback for the first £2,000 spent a year and 1% above that. It also has an introductory 2% offer for the first three months. Platinum Amex overtakes Blue Amex once it starts paying 2%. But Martin advises against Amex for low annual spending: 'Those who fork out less than £500 a year, pay a £15 annual fee with either card, and you need to spend £1,000 on them to get cashback,' he warns.

The Morgan Stanley card pays 1% on all spending up to the first £2,000 a year, then 0.5% In addition, for new customers, it commonly runs a 'double cashback' offer lasting six months.

Finally, your cashback card may also have a seductive balance transfer offer but be aware that your monthly repayments will probably be allocated to repay only the cheap balance-transfer debts. Only when this debt is paid off will your purchase debts, which attract a higher interest rate, be reduced. Separate cards for cashback and balance transfers will help you avoid this trap.