Tesco turns up the heat in credit card war

Consumers' long-awaited credit card war took shape during the last fortnight. Supermarket chain Tesco's entrance into the credit card market with an initial offer of 4.9 per cent APR, which moves to 15.9 per cent next year, has badly shaken the banking sector. Following the card's introduction, financial shares on the Dublin market turned sharply downward.

Bank of Ireland's share price fell by 36 cents to €6.36 (£5.01) and AIB lost 23 cents to €9.90. However, dealers said looming credit card competition was only one factor threatening share prices.

Fighting Back: The day after the plunge, Bank of Ireland claimed the new credit card offerings were not what they seemed. AIB encouraged customers to look at the whole picture, not just APRs.

Bank of Ireland disagrees with recent publicity suggesting that interest rates on Tesco's credit cards and earlier offerings from MBNA are substantially below the rates offered by established players.

In a statement, the bank highlighted its low-rate card that offered an APR of 12.9 per cent. The bank did not mention that the Advantage card offering this rate had no interest-free period so customers paid interest from the day of purchase. Most credit cards do not charge interest if payment is received in full by the due date.

If the card is not paid off, the issuer charges interest on a daily basis.

Bank of Ireland's overdraft rate for personal borrowing - 13.6 APR per cent - is lower than the Advantage card.

The bank's standard and gold credit card APRs are among the highest in the market at 19.3 per cent and 18.9 per cent respectively.

TSB/Superquinn's joint venture, Tusa, which previously had the lowest APR of 17.5 per cent, is also highly critical of Tesco's new card.

The supermarket bank's Mr Brian Mahony says Tusa arrived with a full in-store product range whereas Tesco is just coming in with one product. Tusa is committed long term to offering products and services here, says Mr Mahony.

Tusa encourages customers to pay their credit card through a direct debit from their Tusa current account. While the current amount remains overdrawn, the customer is charged an APR of 10.3 per cent - better than the 17.5 per cent APR on outstanding credit card balances.

Of course, customers of other financial institutions may handle their credit card debt in the same way.

Similar to many providers, Tusa's credit card only applies interest charges to late or partially paid amounts. Tusa has no plans to change its APR.

"While Tesco's APR is 15.9, they have other ways of getting you. If you slip at any stage in the process they'll charge you," says Mr Mahony.

The Penalty Box: Tesco charges penalties that do not apply with any of Bank of Ireland's cards, said a spokesman.

Tesco Personal Finance charges £12 (€15.24) if a customer goes over their credit limit, makes a late payment or cannot pay a cheque or direct debit.

MBNA also applies penalty conditions to its cards. Customers pay £15 each time an item is unpaid, £12 when a payment is not made in full within three days after its due date and £10 each statement date on which the account has exceeded the credit limit.

Ulster Bank levies £5 when customers exceed their credit limit or fail to pay by the required date.

Tusa charges £3.50 for unpaid cheques or cheques sent for collection or special presentation.

Although some other banks do not specify fees they reserve the right to charge for late payments, exceeding the credit limit, return of unpaid cheques or for furnishing copies of sales vouchers and additional copies of statements.

More Foreign Competitors: Despite reports to the contrary, Internet bank Egg has no plans to offer its products in the Republic. The Egg credit card offers a standard rate APR of 10.9 per cent and an introductory rate of 4.9 per cent. Although the Prudential-owned firm says it plans to expand internationally, the countries have not been specified. For the rest of the year, Egg is concentrating on its initial public offering said a spokeswoman.

The European League: Banks in the Republic should not be surprised at the new entrant's effect on the market. A recent European survey commissioned by Bank of Ireland says the Republic's financial institutions perform well compared to its banking counterparts but there is room for improvement. The State fell below the European average in six out of 10 product categories.

"The only product categories that may provide opportunities for further pricing reductions in the Irish market are personal loans and credit cards, although interest rates on credit cards may not reduce further until market penetration levels in Ireland rise to those of most other European countries," says the study.

Last year, the Republic ranked second highest in terms of credit card charges with an average APR of 19.37. Spain tops the table with an average 22.2 APR. France is at the bottom delivering 11.58 APR on average.