Borrowers fail to shop around for credit cards
Consumers are not shopping around for credit cards because providers make it too hard for them to compare different products, the Office of Fair Trading (OFT) has warned.
The consumer watchdog says nearly 70% of credit card customers did not shop around to find the most competitive or suitable deal. It blames credit card companies for failing to describe their products in a way that customers can understand and calls on providers to introduce consistent summary boxes to make direct comparison easier.
Despite research from MoneyExpert claiming that more than 394,000 customers have switched credit cards to get a better deal in the past six months, the OFT says that many consumers are simply opting for the card recommended by their bank. Of those that do shop around, many only compare their card with one, two or three others.
The OFT says that people who do make the effort to shop around are struggling to understand the different deals on offer. The OFT’s research found that the complexity of credit cards means people were unable to successfully compare products.
And credit card companies could be making matters worse. The OFT report into credit cards warns: “It may be in the interests of providers to make product information more difficult to compare.”
Things to consider
When it comes to looking for a credit card the first thing to consider what you need from a card:
- Do you want to transfer you balance rather than use the card for new purchases? You could consider opting for a 0% balance transfer card.
- Do you need to make new purchases? A card with an introductory rate on purchases might be for you.
- Would you rather stick with one card over the long term rather than switch deals regularly? Consider a standard credit card with a low rate of interest.
- Do you want to use your card to make purchases? Opt for a card with the lowest APR on purchases.
- Do you ever use your card to withdraw cash? This should generally be avoided as it is expensive, so if you do have to use your card in this way, it's vital to get the lowest APR for cash withdrawals as you can.
- Do you want to pay off your purchases quickly in order to avoid attracting interest? Make sure you opt for a card that offers a long interest-free period.
Deals on the market
Interest free balance transfer cards are probably most suitable for people who want to move their debt from a high interest card in order to pay it off. These cards are not recommended for people who intend to keep spending on their cards. Recent rsearch from Moneysupermarket.com found that eight of the top credit card providers use customer repayments to cover the cheapest part of the debt first. This means that cardholders paying the minimum balance each month are clearing the interest-free part of their debt without covering the part that is attracting interest.
One of the most competitive interest free balance transfer deals currently on the market is Virgin Money’s MasterCard, which has an APR of 0% for 15 months. There is, however, a balance transfer fee of 2.98% and new purchases will attract an interest rate of 15.9% APR.
Egg Visa also has a 0% APR on balance transfers until 1 May 2009. It has a transfer fee of 3% and new purchases will attract an interest rate of 16.9%.
If you don’t have a balance to transfer but want to use your card to make purchases without attracting any interest then a credit card with an introductory rate might be best for you. When choosing this type of card, you should look at the term of the introductory offer, as well as the interest rate the card will revert to after this has finished.
Purchases on HSBC's MasterCard are interest free for 12 months, but after this period the balance will attract an APR of 15.9%. HSBC also charges 2.9% APR on balances transferred within 30 days of opening the account as well as a 2.5% balance transfer fee.
Halifax MasterCard is interest free for purchases for nine months before reverting to 9.9% APR. It also offers 0% interest on balance transfers for nine months as long as the transfer is made in the first 90 days. You will, however, have to pay a transfer fee of 3%.
If you don’t want the hassle of switching cards after the introductory offer on either balance transfers or purchases has finished then a standard rate card might be for you. These start charging interest from day one, but often at a lower rate than the type of cards detailed above. These types of cards are also suitable if you need to make purchases but know you won’t be able to pay the balance off before the end of the introductory deal.
Barclaycard Simplicity Visa has an interest rate of 6.8% APR for purchases or 15.8% for cash withdrawal. Balance transfers have an APR of 6.8% and customers have 56 days before they are charged interest on purchases. Alternatively, Intelligent Finance MasterCard has an interest rate of 8.9% on purchases and balances transfers, and 22.95% on cash withdrawals. Purchases start attracting interest after 59 days.
Need more options? Moneywise offers tools and calculators for credit card customers to shop around for the most competitive deals.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.