Charges fall as credit cards compete

Credit cards have become more competitive during the past few years with falls in the rate of interest charged and an increase in the number of introductory offers available, research claimed today.

Market analyst Datamonitor said during the past five and a half years the average annual percentage rate (APR) charged by a credit card on new purchases had fallen from 20.1% in January 1998 to 15.6% in August this year.

The group said some of this decline was the result of a fall in interest rates, but most of it was because of increased competition among card providers.

Although the average credit card rate has fallen by slightly more than the drop in the Bank of England base rate, which fell from 7.5% in June 1998 to 3.5%, it has still not come down by as much as mortgage or loan rates.

Instead, it is the rise in competition due to new entrants to the market, such as internet bank Egg, which has forced firms to lower their rates.

The report by Datamonitor said: "Dominated by the leading high street banks, the UK credit card market was relatively stable a decade ago.

"Issuers were able to take advantage of strong market growth, yet faced limited competition.

"This meant that they were able to earn high profits off the back of charging customers large annual fees and high APRs."

But the group said new entrants to the market had sought to win business through price competition, often offering the most competitive rate available. This has led to existing providers also lowering their APRs.

At the same time annual fees have almost disappeared: 80% of credit card providers charged them in 1993 compared with just 1.8% today.

And while no providers offered reduced balance transfer in 1993, 98.2% do now. Indeed, 38.6% of providers now offer introductory rates, something that was unheard of 10 years ago.

Datamonitor said that since 0% introductory offers were introduced to the market in October 2000 by Capital One, packages have changed so that three out of 10 providers now offer a 0% introductory deal.

The group said firms were increasingly using aggressive pricing strategies as tools to tempt cardholders away from their existing providers.

But it added that the number of providers offering these rates fluctuated greatly over time, suggesting issuers used them for short periods as part of specific marketing campaigns.

The Treasury Select Committee is currently looking into a lack of transparency in the credit card market and asking why the APRs that cards charge are still relatively high compared with the Bank of England base rate.