Low-rate credit cards

In the year to March 2006, all interest-accumulating credit card debt in Australia had risen by 17% over the previous year's figures, reaching over $25 billion. However credit card spending overall has actually dropped by 1.1% over the two years to April 2006, making credit cards responsible for around 56% of Australian spending.

In an attempt to stay ahead of the pack, credit card providers are now offering special incentives to customers. These include 0% balance transfers, rewards programs and attractive ongoing interest rates. But is the low-rate credit card really as good as it sounds?

Pros and cons of a low interest rate

A low interest rate can be a credit card's biggest pull, but this attractive feature often comes bundled with certain less appealing traits. By offering a lower rate, financial institutions are losing out on revenue, and this lost money needs to be recouped somehow. Higher fees and charges are predominant in low-rate cards. Some fees to watch out for include:

• Annual fees – most low-rate cards require payment of an annual fee. In comparison, many standard-rate credit cards have no annual fee. Low-rate cards offering the no annual fee bonus include the Virgin MasterCard and HSBC Low-Rate Credit Card.
• Cash advance rate – don't be fooled. The cash advance rate can be up to 10% higher than the rate for purchases. Some low-rate cards are addressing this, such as the Citibank Clear Credit Card and St George Starts Low Stays Low Credit Card.
• Late payment fees – these have risen steadily and can be substantial, especially on low-rate cards.
• Fees for exceeding credit limit – not only do you automatically accrue a significant fee for exceeding the credit limit, some cards charge a higher interest rate on any amount over that limit.
• Other fees and charges – such as ATM fees and overseas payment charges.

Low-rate cards also generally have limited additional features such as emergency assistance, extended warranty and insurance options.

Rewards programs

With the increased competition and a limit on how low the interest rates can go, many providers are now seeking other ways to sweeten consumers, with many looking to rewards programs to promote consumer loyalty.

Virgin offers discounts to its customers through its Mate's Rates program, including travel, accommodation, sports equipment and more. Citibank have recently formed a relationship with BP and released the BP Citibank MasterCard, with discounts, bonuses and cash-back offers.

Credit cards offering a cash-back bonus are growing in popularity. The NAB has released a credit card with a capped cash-back rate of $10 a month. However, conditions do apply.

The old favourite frequent flyer program is still popular as well, where frequent flyer points are accrued each time a purchase is made. These points can then be redeemed for air travel with the partner airline.

By marrying together a low interest rate and useful rewards program, providers have found a way to increase the attractiveness of their cards and stay ahead of the competition.

Who can benefit from a low interest rate?

If you don’t pay your credit card off in full each month, or you make large purchases irregularly, a low-rate card might be good for you. But if you tend to pay your card off in full each month, a card with a high number of interest free days and more features like rewards programs may be a better option. And as with any financial product, don't forget to check all the fees, charges, benefits and features before signing up.

Looking for a low-rate credit card? You can compare credit cards with Money Buddy now.