The end of free credit cards?
Fee-charging credit cards could soon become the norm, with customers paying a monthly fee in return for features like balance transfers, a low interest rate and cashback.
Egg has this week become the first major credit card provider to launch a mainstream fee-based card, and experts believe other providers will soon follow suit.
The new Egg MasterCard costs £1 a month (£12 a year) and in return customers receive 1% cashback on all purchases made at MasterCard outlets, up to £200 a year. This means people only need to spend £100 a month on their card in order to recoup their monthly fee, as long as they pay off the balance in full every month and avoid interest charges of 16.9% APR.
The Egg MasterCard, which is available via online-only application from 14 July, also comes with a balance transfer rate of just 8.9% for life, and there is no fee to transfer balances from other cards. In comparison, the top balance transfer credit cards offer 0% for up to 16 months (subject to a fee of between 2% and 3%) and then revert to around 17% APR.
Egg consumers will pay £145 interest on the average balance transfer (£1,846), according to uSwitch.
Is it worth it?
Customers need to spend £100 a month in order to offset the monthly fee on this card, with any further spend earning them cashback to keep. However, this card is really only suitable for people who are able and willing to pay off their credit card balance in full within the 50-day interest-free period.
There is also the issue of the order of payments. This card has different interest rates for balance transfers (8.9%) and new purchases (16.9%) but Egg will use payments to settle the balance attracting the lowest level of interest first. This is known as negative payment hierarchy, and is common to most credit card providers bar Nationwide.
Generally speaking, it is not a good idea to use just one credit card for both balance transfers and new purchases.
Louise Bond, personal finance expert at uSwitch.com, says: “We would never advise consumers to use one credit card for both balance transfers and purchases unless they fully understand the interest implications first.”
Instead, you might be better off transferring an outstanding credit card balance onto a 0% credit card and paying it off within the interest-free period, while using the Egg card for new purchases so you can make the most of the cashback on offer.
Peter Harrison, credit card expert at moneysupermarket.com, says that people who want to pay back their debt slowly over several years might be tempted by the Egg MasterCard as opposed to a 0% deal – but whether it is best for them will depend on their circumstances.
"Egg offers a competitive life of balance transfer deal at 8.9% if you want to pay back the debt over a longer period of time - with the card acting as an alternative to a loan, especially as this product no longer has a balance transfer fee,” he explains.
"As ever, people must weigh up the pros and the cons and see what will suit their needs best, and as a general rule of thumb anyone planning to pay their balance off in full within two years would do best with the Virgin credit card [0% interest on balance transfers for 16 months subject to a fee of 2.98%].”
The card also comes with a variety of different protection and insurance offers, but these should not be seen as a substitute for standalone insurance and are unlikely to be attractive enough to make the £12 annual fee worth paying.
Other benefits include:
* Discounts of up to 25% off selected online retailers, including Lastminute.com, Virgin Wines and Figleaves
* All card purchases costing more than £75 are covered against theft, loss, or damage, for 90 days after the date of purchase. Tickets for events costing £20 plus are also covered if you are unable to attend
* Egg will refund the difference on any purchase costing more than £50 if you later find it cheaper locally within 30 days
* All electrical items costing more than £50 receive an additional 12 months' extended warranty once the manufacturer's warranty expires
* Personal travel accident insurance, which covers you while travelling as a fare-paying passenger or in any hire car
A glance at the small print, however, reveals exclusions to these incentives.
For example, Egg’s promise to refund items if they are found cheaper within 30 days doesn’t cover internet purchases and you can only claim four items a year costing no more than £375 each.
The insurance on purchases, meanwhile, is limited to items costing up to £3,000 and claims up to £6,000, or £15,000 per cardholder per year. Items lost or stolen must also be reported to the police within 36 hours.
"The benefits are very specific to stand-alone items,” says Bond.
Future for credit cards
The new card from Egg reflects the changing face of credit cards, the balance transfers. The credit crunch has made it harder for people to get credit cards, with interest rates and charges creeping upwards and lending restrictions getting tighter.
Balance transfer deals, which were traditionally associated with ‘rate tarts’ (who moved their debt around in order to pay it off in the cheapest possible manner) are now harder to come by.
For example, Harrison points out that Capital One has withdrawn from the 0% balance transfer market, Royal Bank of Scotland (which operates both the NatWest and Mint brands) now only offers 0% balance transfer deals to existing customers, and Tesco has reduced its 0% balance transfer offer. Further consolidation – such as the HBOS and Lloyds merger and Santander’s re-brand of its UK banks – might lead to fewer balance transfer offers and more exclusions.
"Lenders are also sharing more information with each other and this could further decrease the number of people being accepted for the best balance transfer deals,” Harrison adds. “This will come as a shock for the many rate chasers that have grown used to consolidating debt onto new 0% balance transfers deals over the last few years."
The launch has also prompted speculation that other credit card providers are looking at introducing ‘packaged’ credit cards, where customers receive some worthwhile incentives in return for a fee. This has already happened in the current account market, with banks increasingly looking at offering premium accounts for fee-paying customers.
Bert Pijls, chief executive of Egg, says: "Egg Money is the only credit card to combine 1% cashback, discounts, protection and a low life of balance transfer rate. To offer this level and variety of benefits to customers there is a small fee of £1 a month - good value for what we believe is the best all-round card on the market.”
Depending on the customer reaction to Egg’s new card, its competitors may well look to launch their own monthly fee cards. On one hand, this will eventually reduce the number of ‘free’ credit cards with attractive features, while on the card ‘fee’ cards will have to become more competitive.
Andrew Hagger, spokesman for comparison website Moneynet, says: “I hope this is not going to set a precedent that the rest of the market decides to follow, and that paying a fee for your card becomes the norm.”
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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%.
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