Credit card rates don't tell the full story

Don't forget to read the instructions before flexing the plastic, writes Laura Slattery

The pre-Christmas season is boom time for the people who handle credit card applications.  After today there are "only" 50 shopping days - which is to say there is 50 days left - before the mass exchange of iPod nanos, Sex and the City box sets and Roboraptors takes place. And it all has to be paid for somehow.

The latest credit card promotion is for AIB's strictly lower case "be" credit card, where the interest rate after the first year depends mainly on how big a splurger the cardholder is.

The AIB advertisements feature a blissfully happy, loved-up couple who just happen to be carrying a multitude of shopping bags. But credit cards can be an expensive toy to play with if you don't read the instructions beforehand.

The APR

AIB's new credit has an introductory annualised percentage rate (APR) of 6.9 per cent on purchases for the first 12 months. Most people reading this on the bank's advertisement will probably ask themselves: is that good?

According to a recent report commissioned by the National Adult Literacy Agency (Nala) and EBS Building Society, only 45 per cent of the general public could correctly identify the meaning of the term APR.

APR is the figure, shown in percentage terms, representing the rate of interest and other fees a borrower pays as a matter of course on a loan or credit card.

So is AIB's rate of 6.9 per cent good? It is the lowest rate available over a full 12 months. Well,Ulster Bank charges a 0 per cent rate on purchases for the first nine months on both its standard and zinc credit cards.

Tesco, Bank of Ireland and National Irish Bank (NIB) also offer 0 per cent rates on purchases but over shorter periods.

The AIB card reverts to a rate of either 13.9 per cent or 16.9 per cent after one year.

To get the lower rate, cardholders must spend more than €5,000 in the first year using the card.

But cardholders can't go completely wild. Incur more than one late payment or returned payment fee or exceed their credit limit during the first year and they will have to make do with the 16.9 per cent rate.

Ignore introductory offers altogether and the card with the best rate on purchases is Permanent TSB's Ice card, which has a rate of 9.9 per cent.

The APR won't matter at all, of course, to people who pay off their full card balance every month and never incur interest, not even at Christmas.

Balance transfers

The balance transfer rate is simply the interest rate that a credit card company will apply to any outstanding balance built up at another credit or store card that is then transferred to a new card. Ulster Bank, Tesco Personal Finance, NIB and AIB all freeze the interest payable on balances transferred from other credit cards. The longest interest-free period is available from Ulster Bank, which allows new customers up to nine months to clear an outstanding debt before applying interest. Bank of Ireland, meanwhile, offers a rate of 2.9 per cent over 12 months.

The time periods for these offers are maximums. In other words, if the value of the balance is cleared in a shorter space of time, the special rate ceases to apply.

Most card providers use any payment cardholders make to reduce the amount of the transferred balance before using it to pay off cash advances and purchases. This can be a bad thing if consumers use their credit cards to withdraw cash.

For example, a cardholder might transfer a balance of €1,000 to a new card, where they have a 0 per cent introductory interest rate on balances and purchases.

They might then use the card to withdraw €100 from an ATM and subsequently make a payment for €100 within the 56-day interest-free period on cash, under the assumption that they can thus avoid the cash advance interest rates of 11.6-20.68 per cent.But instead some card providers, will credit the €100 against the €1,000 transferred balance, leaving the customer exposed to the high cash advance rates.

The cardholder will only stop paying interest once they have cleared their full €1,100 bill.

Ulster Bank is the one card provider offering interest-free balance transfers and an interest free period on cash withdrawals that uses payments in this way.

The minimum payment trap

According to the financial regulator, cardholders who fall into what it calls the minimum payment trap can quickly build up stubborn debts on their card that they then find difficult to shift.

In one study conducted by the regulator last year, a cardholder who only makes minimum payments on a debt of €4,000, and who incurs three late payment fees and one unpaid item fee, will make a dent of as little as €23 in the debt after a whole year.

MBNA cardholders who only pay the minimum amount will have the highest outstanding balance, still owing €3,977 after a year, the regulator's study found.

This was largely because the company only requires customers to pay back 2.25 per cent of their outstanding balances each month. AIB, on the other hand, demands its customers pay back at least 5 per cent of their balance each month.

So cardholders making just the minimum repayment will slash their debts by €1,526 in 12 months.

Of course, if cardholders are determined to give in to temptation, and only repay the bare amount to avoid penalties, lower minimum repayments may give them some flexibility in their month of need.

But MBNA cardholders will do well to avoid late payment and unpaid item fees, as it charges more than any other card provider. MBNA cards - which are also sold through One Direct, EBS and Ryanair - have a charge of €15.24 for each late payment, compared to just €3.81 at AIB.

Bank of Ireland, National Irish Bank and Permanent TSB do not even have such a charge.

Cash advances and credit card cheques

Using a credit card to withdraw cash from an ATM is generally a bad idea, as the interest rates charged on cash advances are higher than the rates charged for making purchases.

Some card providers do have an interest-free period on advances - the interest rate won't matter if you clear your balance in full by the due date. AIB, American Express, Bank of Ireland, Barclays and Ulster Bank cardholders can avail of up to 56 days interest-free cash on credit.

But Tesco, Permanent TSB, National Irish Bank and MBNA cards don't have any interest-free period on cash, making rates of up to 18.7 per cent APR unavoidable from the second cardholders stuff their cash into their wallets.

Almost all card providers, the exceptions being National Irish Bank and EBS's standard card, charge a cash advance fee equating to 1.5 per cent of the value of the withdrawal.

MBNA frequently sends its customers credit card cheques, which it explains can be used at times when they can't use their card, such as when paying tradesmen or bills by post. It describes the cheques as "a valuable addition" to its credit cards and a way to "write yourself an instant loan".

But the small print reveals the credit card cheques are treated as cash advances and that interest will accrue as soon as the cheques are presented to MBNA for payment.

An independent guide to personal loans and credit, and copies of the financial regulator's credit card cost surveys are available at www.itsyourmoney.ie, by calling its lo-call helpline on 1890 777 777 or by visiting its information centre at College Green, Dublin.