Cutting the cost of your plastic

The amount that people in the UK spend on credit cards has increased dramatically in recent years. Last year, credit card spending reached a massive ?70 billion, following five years of average annual rises of 15 per cent.

Generally, between 40 and 50 per cent of cardholders pay their bills in full each month, figures from the Credit Card Research Agency show. But it isn't always the same 40 to 50 per cent. Three-quarters of card holders pay their bills in full in some but not all months. In all, borrowers in the UK now owe ?22 billion to credit card providers.

However, the rates of interest payable on this debt vary widely from card to card and many borrowers pay much more than they should. Steve Worthington, professor of financial services at Stafford University, who compiles an independent quarterly credit card index for card issuer GM Card, says: 'Many consumers have cards through which they pay more interest than they need to, or they miss out on some valuable reward schemes.'

In fact, the standard rate of interest charged can vary from less than 1 per cent a month to more than 2 per cent - an annual percentage rate (APR) of between less than 10 per cent and more than 20 per cent.

Moreover, there is no reason to stick with your existing credit card if a better deal is available elsewhere. With 1,300 different brands of credit cards on offer in the UK from 33 different issuers, competition in the industry is fierce. There are good deals available to every type of borrower and many lenders offer very low introductory interest rates to encourage people to switch.

However, which card suits you best depends on your spending habits. Many credit cards offer up to eight weeks' interest-free credit if you pay your bill in full by the due date each month. Those who do always pay off their bills should pay less attention to the interest rate payable and concentrate on the various perks which are on offer.

John Murray, a director at the Credit Card Research Agency, says: 'If you use your card as a convenient means of payment which you pay off each month, the maximum interest-free period suits. If you have an outstanding balance for some period of time, you need to pay particular attention to the interest rate.'

Several lenders are currently offering very attractive headline rates of interest. Indeed, the Capital One Premier Visa card actually has a 0 per cent interest rate for the first six months on purchases you make on the card. This rises to 12.9 per cent thereafter. The amount you pay on any balance you transfer to Capital One from your existing card is 7.9 per cent and the card also offers a 54-day interest-free period.

Worthington says: 'In the last two years we have seen the demise of the annual fee charged by card issuers. Now we are seeing interest rates being cut. This is following the trend in the US. Companies will make up their income stream in other ways such as charges on late payments.' Most cards will also charge a fee if you lose your statement or go over your credit limit.

Consistent borrowers who never get round to paying off their debts in full should look for the lowest interest rate. But be careful with transfers. Some lenders limit special offers to the transferred balance. Subsequent purchases may be charged at the standard rate. And monthly repayments will reduce your transferred balance, on which you pay cheaper rates of interest, rather than the more expensive new spending.

Avoid this by picking a card which offers a low introductory rate for new purchases as well as transfers. These include RBS Advanta, which charges 2.9 per cent a year until June next year, and Nationwide at 3.5 per cent a year for the first six months.

For good long-term rates, Northern Rock, at 10.5 per cent a year, and Intelligent Finance, the new service from Halifax, at 10.8 per cent a year, are among the cheapest. Abbey National's internet arm Cahoot charges 7 to 11 per cent a year on its cards while the APR on Egg's card is 10.9 per cent.

These cards will also suit card-holders who pay off their balances in full in some months, but tend to borrow in heavy spending periods such as Christmas and holidays.

If rates are not a consideration, it may be worth looking for a card that offers benefits linked to how much you spend. For Air Miles look at NatWest or Sainsbury's, and for gifts and bonuses Barclaycard, Goldfish, HSBC, Sainsbury's and Tesco all have special offers.

Both GM and the Internet Credit Card Scorecard, run by Gomez, produce league tables to help consumers find the best deal to suit their spending. GM covers all cards while Gomez includes online lenders only.

Useful contacts: GM Card Index I 0845 746 2777; www.uk.gomez.com ; Intelligent Finance (IF) I 0845 609 4343; Capital One I 0800 952 5150; RBS Advanta I 0800 77770; Goldfish I 0845 760 9060, egg www.egg.com; Cahoot: www.cahoot.co.uk


What to look for

? How long after you make a purchase do you begin paying interest on the money borrowed? This can range from zero to 56 days.
? What interest rate is payable if you do not pay off your bill in full each month?
? Is an attractive introductory rate available? If so, to what does it apply and for how long does it last?
? Does the card carry an annual fee or stiff charges for late payment?
? Are there benefits which you find attractive, such as air miles, cashbacks or charitable contributions?
? Is there a good level of customer service - for example a freephone number which operates 24 hours a day?