Rise in Low Interest Rate Credit Card Deals, But Beware of Cash Charges

By: MoneyFacts

The latest research from Moneyfacts.co.uk shows that the number of low rate credit cards (cards charging less than 12%) has grown 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 is the lowest rate card on the market since 2006, when a 5.9% APR card was available*.

These cards can be a cost-effective choice for those borrowers who are unsure about being able to clear their balance within the timeframe set by a card with an interest-free 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 dear if they fail to clear their balance in time. 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 (6.4% APR).

However, while low rate cards certainly trump 0% offers once their initial deals end, borrowers should be aware of the costs for transactions such as cash withdrawals: a typical charge is 27.95%, which would mean paying £326.80 in interest on the same repayment basis as above, and that’s without withdrawal fees being factored in.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“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. 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.

“To increase their chances of securing the lowest rates, consumers would be wise to check their latest credit report and make sure they don’t have an excessive credit limit across different forms of borrowing. Sometimes a lack of a credit footprint can also go against a borrower, so if building a credit record becomes necessary, then a credit repair card should be the first port of call.

“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 as much off as possible on a monthly basis. 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.”

*Our Moneyfacts electronic card records began in June 2006 when a 5.9% APR card was available; this rate was available until March 2007.

**Calculation based on a minimum repayment of 3% (£15) on a balance of £500. On 6.9% APR, the interest would be £51.30, while at 27.95% APR it would be £326.80.

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