BBS reports on credit card interest rates

Issue date: 20 April 2005

ISSUE DATE: 20/04/05
•Growing consumer demand for cards offering one low flat rate of interest
•‘Switchers’ taking advantage of interest free credit costs UK credit card industry over £80 million a month
•Financially, some credit card issuers may feel they need to introduce charges to their 0% offers

A new report by Professor Merlin Stone of the Bristol Business School claims that there is likely to be a dramatic increase in the number of credit cards offering flat rates of interest. Primarily, this will be driven by growing demand from consumers. Indeed, research commissioned for the report reveals that if people were looking to take out a new credit card, 61% would prefer one with a clear low rate of interest as opposed to different introductory rates for purchases and balances transfers. This compares with just 35% last year.

The report, which was commissioned by credit card company Capital One, claims that this trend will also be fuelled by the need for issuers to differentiate themselves in an increasingly competitive marketplace, and also to help offset the increasing cost of acquiring customers. Indeed, there is likely to be a fall in the number of cards offering interest free periods that do not have conditions attached such as fees for balance transfers. However, offers of interest free periods will remain a key feature of the market because there is strong consumer demand for them and they are a very effective way to build a customer base.

The report claims that the industry is losing over £80 million a month as a result of customers taking advantage of interest free periods and switching to other providers once they expire. Despite this, with over 60 suppliers in the market offering more than 1,500 cards, credit card companies also have to spend more on marketing to attract new customers. In the year to 30 June 2004, their marketing expenditure increased by just under 50%.

Professor Merlin Stone, Bristol Business School, said: “Economically, some providers cannot sustain their current offers of 0% interest which means they may have to remove them or start introducing new charges to help reduce their losses. Research shows that in 2003, none of the cards offering 0% APR interest on balance transfers applied charges for transferring balances compared to around 11% that do today.

“Card issuers will also increasingly look to find other ways in which to differentiate, the most obvious being the introduction of standard flat rates of interest.”

Ken Stannard, Capital One said: “Capital One introduced the first UK credit card with an interest free period. Last year, we launched the lowest flat rate card available in the UK, currently offering 6.9% p.a. variable for both purchases and balance transfers (6.9% APR typical variable).”

“We are responding to a growing number of credit card customers who are looking for cards that offer low flat rates of interest as opposed to switching providers every six months when their introductory periods expire."

Credit card ‘switch fatigue’ fuels growing demand for flat rate credit cards
There is growing evidence of ‘switch fatigue’ amongst UK credit cards holders. Capital One research reveals that 4.2 million people have transferred credit or store card balances to other cards with the intention of clearing them before the low introductory teaser rate expires.

However, fewer than two thirds (61%) actually claimed that they managed to do this. Of those transferring balances to other cards in the hope of clearing them before their teaser rates expired, one in three could only clear some of them. Nearly half (49%) of these people say this was because the offer of their introductory rates were too short and 13% forgot when the low rate expired.

Of the five million people who have switched balances between credit cards to get a lower rate, 50% have not transferred again, in some cases because they found it too much hassle.

A demand for lower rates on credit cards
In addition to this, the research also shows that the majority of cardholders believe that interest rates on credit cards are too high. 46% of all credit cardholders would be happy to stick with one provider if they offered a low long term interest rate. Indeed, just over one in five (22%) cardholders who switch to other cards does so in order to take advantage of a more competitive long term rate.

When credit cardholders were asked what they would look for when taking out a new card, 61% said that the most attractive proposition would be one offering a very low single rate.

Flat rate best buy table
Research by Moneyfacts reveals there are 22 credit cards currently offering one flat rate of interest for both purchases and balance transfers. Although still a small number of cards, it is important to note that the majority of them are issued by some of the biggest issuers in the marketplace including Halifax, Abbey, Virgin, the Co-operative Bank and Capital One.

Flat rate credit card best-buy table
Company Name of card APR (purchase and balance transfers
Capital One No Hassle 6.9%
MBNA Europe Bank Flat Rate Mastercard 6.9%
The Co-Operative Bank Platinum Flat Rate 8.9%
The Co-Operative Bank Gold Base Rate Visa 9.2%
The Co-Operative Bank Gold Flat Rate 9.9%
Abbey Flat Rate Mastercard/Visa 10.9%
Virgin Flat Rate Option 10.9%
Source: Moneyfacts (6th April 2005)

Merlin Stone said: “Cards will continue to differentiate through factors such as
colour and links to third parties or lifestyles, but the most effective way to stand out in this market is through low interest rates. Given the growing competition in the UK credit card market and the challenging economics of sustaining interest free offers, the next major change to sweep the UK credit card market is therefore likely to be flat rates of interest. Increasingly, growth for card issuers will depend on how low they can go on their standard rates.”

For further information, please contact:
Richard Holmes/Sally Camm
Capital One UK Tel: 0115 843 3174/3676
Phil Anderson/Patrick Evans/Marisa Elliott
Citigate Dewe Rogerson Tel: 020 7638 9571

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