Rise in low rate cards – but beware of charges - Credit cards - News - Moneyfacts


Rise in low rate cards – but beware of charges

Rise in low rate cards – but beware of charges

Category: Credit cards

Updated: 16/11/2015
First Published: 12/10/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The latest research from Moneyfacts shows that the number of low rate credit cards (cards charging less than 12% APR) has grown considerably in recent years, but while that's good news for borrowers who want a straightforward way to manage their credit commitments, they're being urged to look out for higher cash withdrawal fees.

A growing market

Our figures show that the number of low rate cards available has risen by a third in the past two years, rising from just 12 cards in 2013 to 16 today. The lowest purchase card now on offer charges just 6.4% APR for standard purchases, and it's the lowest rate card on the market since 2006, when a 5.9% APR card was available.

Even though cards charging 0% interest tend to hit the headlines, low rate cards can be a cost-effective choice for borrowers who are unsure about being able to clear their balance within the set timeframe of an introductory purchase or balance transfer offer. Many interest-free deals have much higher reverting rates of interest after the upfront offers expire, which could cost borrowers dearly if they fail to clear their balance in time, making low rate cards a viable alternative.

For example, a common rate of interest applied to purchases after a lucrative interest-free offer ends is 18.9% APR. If only £15 a month is paid off until the debt has been cleared, the cost of a £500 balance would be £174.78 in interest. This is considerably more than the £47.22 that would be charged by the lowest purchase rate card on the market (6.4% APR).

But be on your guard

However, while low rate cards certainly trump 0% offers once their initial deals end, there can be drawbacks, namely the fees associated with them. It's vital to be aware of the costs for transactions such as cash withdrawals: a typical charge is 27.95%, so if a borrower wanted to use the card to withdraw £500 in cash, they'd end up paying £326.80 in interest on the same repayment basis as above (£15 paid per month until the balance is cleared), and that's without withdrawal fees being factored in.

Even a fairly innocuous sum of £50 can add up if you don't pay it off straight away, so really, these cards should never be used for cash. "Shoppers who frequently use a low rate credit card may be tempted to use them for an emergency cash withdrawal at an ATM, but before they commit to this, they must check what rate of interest is applied as some providers crank up the costs for this use," said Rachel Springall, finance expert at Moneyfacts.

"Halifax, for example, charges just 6.45% on cash withdrawals, but MBNA charge a whopping 27.9% on their Low Rate card, four-times the rate of interest charged for purchases. In addition, cash withdrawals can also incur a separate fee, which is most commonly set at around 3%.

"These low rate cards are an enticing option for shoppers who are looking for a cost-effective credit card for their day-to-day spending, but as with any card, the advertised rates are never guaranteed, so it's worth keeping this in mind when applying."

Boost your chances of success

So, just how can you increase the chances of securing the rate you want? Well, one of the most important things you can do is check your credit report. This will give you insight into how likely you are to be approved credit, and it can also give you an idea of areas to focus on to boost your chances of success.

While it's important to make sure you don't already have too much credit, sometimes a lack of a credit footprint can count against a borrower just as much, so make sure to check your history – ideally by using an approved credit check provider such as Experian CreditExpert – so you know what to do next.

Once you're confident in being accepted, you can apply for that all-important card, but it's still important to be sensible. "As always, credit cards should only ever be used when borrowers can afford to keep up their repayments, and above all else, they should aim to pay off as much as possible on a monthly basis," added Rachel. "If borrowers struggle to pay back their debts, then they should seek financial advice as soon as they can so they don't fall into a spiral of debt in the longer term."

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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