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Low interest credit cards

Figures from the Bank of England reveal that consumers in the UK owed £55 billion on credit cards at the end of 2006. Furthermore, we spend around £10 billion a month on our credit cards, according to banking payments association APACS.

With the average yearly credit card interest rate (known as the Annual Percentage Rate or APR) around 16%, many consumers are paying expensive interest charges on card debts. Instead of paying the high charges, it makes sense to switch providers to get a lower interest rate. If you've got a hefty balance, look for a provider offering 0% for transferring your debt or look to switch your balance to a card with a low APR for life.

Be wary however, as many credit card providers use promotional low introductory rates to lure people into opening an account. These offers can look very inviting, but when you scratch beneath the surface you discover that credit card users often don't receive the full benefit of these low rates. Most providers apply repayments to the cheapest debt first making it more expensive for you and more profitable for them.

For example, if you have a transferred balance of £500 on your card and during the month took a cash advance of £100 and make a monthly repayment of £80, the payment will first be allocated to those balances that are at the lowest rate of interest, such as 0% balance transfers. Debts charged at more expensive rates, for instance a cash advance, which can be charged as much as 30% interest, will sit in your account and be paid last.

You can avoid being stung by what is known as the negative payment hierarchy by having a couple of different cards that you only use for one purpose. So transfer your balance to a 0% card and do not use it for purchases, and have a different card for spending which has a low interest rate for purchases.

A decade ago the UK credit card market was relatively stable and dominated by the high street banks. The increased competition in recent times is due to new players in the market, such as US banks Capital One and MBNA and internet banks such as Egg.com, who have forced card issuers to drop their interest rates.

The new players have sought to win customers by offering low interest credit cards with the most competitive rates available. This has led to existing providers also lowering their APRs.

A significant change has been the introduction of 0% offers and reduced rates for balance transfers. Capital One were the first to introduce a 0% rate in October 2000, now three out of 10 providers offer a 0% introductory deal.

In 1993 there were no providers offering reduced balance transfer rates, today 98.2% do.

In addition annual fees have almost disappeared: in 1993 80% of credit card providers charged annual feees compared with just 1.8% today.

Research by market analyst Datamonitor revealed that the average annual percentage rate (APR) charged by a credit card on new purchases fell from 20.1% in January 1998 to 15.6% in August 2003.

However, although credit card rates have fallen by slightly more than the drop in the Bank of England base rate, they have not fallen as much as mortgage or loan rates.

Datamonitor suggest that the reduction in rates was in part a result of a fall in interest rates, but more significantly it was as a consequence of increased competition in the marketplace.

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