Sky-high charges for store credit cards shows it pays to shop around

Next week the chief executives of Britain's biggest banks are due to appear before the Treasury Select committee of MPs to explain why credit cards have to charge such high rates of interest, many of which have remained unchanged while Bank of England base rate has halved.

This will be only the latest in a series of developments in the credit card market, making it all the more important for consumer to keep a close eye on what they are being offered. Low-rate and no-rate deals abound - but at a price.

This week the Office of Fair Trading said it was launching an investigation into the high interest rates retailers charge on store-based credit cards. The OFT wants to find out whether there is enough competition and transparency in the market.

But last week the level of competition stepped up when Marks & Spencer said it was expanding its store card to make it a fully fledged credit and loyalty card.

The M&S "&more" card will combine loyalty and credit, as Tesco's and others do. It will operate as a normal credit card, but all spending will earn loyalty points which will be translated into vouchers for use in M&S stores.

Stuart Glendinning, director of credit cards at moneysupermarket.com, said: "Our research shows loyalty credit cards serve a purpose for disciplined borrowers who pay off their credit card balances each month, but their value can often be difficult to calculate and they can be restrictive. The new card equates to 1 per cent given back to the consumer for every £1 spent in store, but this reduces to 0.5 per cent for every £1 spent out of store.

"There are bigger and better benefits to be had elsewhere for these types of consumers. I would suggest that a disciplined borrower instead choose one of over 20 cashback cards that are flexible and where the benefit can clearly be calculated."

On the face of it, signing up to an introductory credit card offer could save you plenty of money. Last year, British shoppers slapped a massive £209bn on the plastic, according to the Credit Card Research Group, equal to nearly £6,600 a second.

If all of this deferred spending was suddenly transferred to a zero per cent interest rate, the accountancy group PriceWaterhouse-Coopers calculates that in six months we would save about £2.5bn.

But credit industry watchers warn that finding the best deal can be difficult. Mike Naylor, a senior researcher at the Consumers' Association, says the biggest trap people fall into is misunderstanding what the introductory rate actually refers to.

"It's easy to think this applies to new purchases, but it may only apply to the original balance transferred," he says. "The terms and conditions explaining this difference will be there, but often only in the small print."

Even if you are clear about the introductory offer, working out the best deal can be tricky. Melanie Stewart, head of research at the financial website Moneyfacts.co.uk, says: "It can be hard to figure out whether you are better off going for a nought per cent interest rate for a limited period, or a low per cent interest rate for a longer period."

And it doesn't help when the quoted interest rate is only "typical". In this case, to find out what you will really be charged, you have to undergo a full credit check. It does not take much for credit card companies to see you as an unsafe bet.

According to a recent Which? report, called Buy Now, Pain Later, "you can have a bad credit rating just because you missed a payment in the past or simply because you haven't borrowed money before".

If you are seen as risky, for whatever reason, the interest rate you are offered can be considerably higher than the one in the glossy advertising. At Cahoot, for example, you may pay anything from 8 to 13 per cent. Barclaycard ranges from 11.9 to 24.9 per cent.

In research commissioned by Egg this year, only one in 10 shoppers was offered the cheapest advertised rate. And fewer than 30 per cent were told in advance that their rate could be based on their personal circumstances.

Figuring out the best credit card deal can get more complicated still once hidden costs are factored in. Most card companies charge anything from 0.5 to 2.75 per cent to use a credit card overseas. Interest rates on cash advances can be up to 29 per cent. And some cards have an annual fee, sometimes tied to spending levels.

First Direct Gold Visa holders are stung for £20 a year unless they spend more than £1,200 annually with the card.

Finally, when shopping around for a better deal, how much attention should you give to the credit cards that offer cash back or a charity donation? "Not a lot", says Ms Stewart. "If you are running up a balance every month, cashback and charity donation cards are not very competitive." Their interest rates vary from 14.9 per cent to 18.1 per cent. This is an expensive way, argues Ms Stewart, to gain a meagre 1 per cent cash back or make a very small donation to charity.

Plastic has become an integral part of everyday living. Collectively, we hold 120 million credit cards. and there are at least 1,500 different kinds on the market. To identify the best one for you, first understand how you use your credit card then read all the fine print on those that appear to meet your needs.

And remember, as Ms Stewart says, "nobody is going to give you something for nothing. Sooner or later they will be charging you." But, if you keep your wits about you, at least you can determine how much or how little that will be.

'I was outraged by my new Smile card. I felt duped'

Carmel Hunt works in London as a research assistant for a US bank, and is careful with her own finances. This partially explains why she was "so indignant and so angry" when her attempt to get a better credit card deal initially backfired.

"Last winter I switched to Smile because they were offering 0.5 per cent cash back and zero per cent interest," she says. "I thought this was a flat rate, but it wasn't. It just applied to the balance transferred and not to new purchases. I only found this out when my first bill arrived and I was charged £18 interest. I was outraged. I felt duped. It turns out everything was explained in the small print. But to me this seemed very unfair. I rang up and complained and they agreed to give me the money back. I then immediately went out and got another card. I'm now with Egg. The whole thing has been a really sharp learning curve. I'm telling everyone I know to be very, very careful."

Until recently Nicola Fanshawe from Kent had no reason to worry about her credit card interest rate. She always paid her balance off in full. "I am careful with my money. I don't like getting into debt," she says.

But when the 29-year-old tour operator went on holiday to America, she indulged in what she admits was "a bit of a spending spree". She clocked up £500 on her Barclaycard, which charges her 17.9 per cent interest.

"I knew there was no way I could clear that amount by the end of the month," says Ms Fanshawe, "and I didn't want to pay more than I needed to, so I looked around for a better deal. I went with a zero per cent balance transfer with Abbey National. The whole process was quick and easy. I just filled out a form and that was it. I'm now recommending switching to all my friends."

CONTACTS

* Barclaycard: www.barclaycard.co.uk 0870 154 0154

* Co-operative Bank: www.co-operativebank.co.uk 0845 600 6000

* Egg: www.egg.com 08451 233233

* Goldfish: www.goldfish.com 0800 885555

* Halifax: www.halifax.co.uk

* HSBC: www.banking.hsbc.co.uk 0800 130130

* Marks & Spencer: www.marksandspencer.co.uk; 0800 363494

* MasterCard: www.mastercard.com

* RBS Advanta: www.rbsadvanta.co.uk

* Visa: www.visa.com