Your money: The grandaddy of credit cards fights back

Thirty years on, Barclaycard prepares to undercut the upstarts who have shrunk its market share. Clifford German reports

Since Barclaycard introduced the UK's first credit card, back in 1966, cheaper rivals have been steadily eroding its market share.

Last weekend the company finally launched its long-awaited counter-attack. Roughly half the 7 million Barclaycard holders will benefit from lower interest rates, or the abolition of the pounds 10 annual fee, or both. But this could also be the start of an all-out war that will see annual fees abolished and interest rates on unpaid balances tailored to individual customers.

Barclaycard holders who spend pounds 300 in a month will have the rate of interest charged on unpaid balances reduced from 1.65 per cent to 1.515 per cent in the following month, which is equivalent to cutting 2 per cent a year off the standard annual percentage rate of 22.9 per cent. If they spend pounds 500, the interest will go down to 1.375 per cent the following month, a 4 per cent reduction in the APR.

The controversial annual fee, which many newer rivals do not charge, will also be waived for all customers who spend pounds 5,000 a year on their Barclaycards, or pounds 8,000 a year on a Goldcard. A card holder with a running balance of pounds 1,000 a month who spends pounds 300 a month would save pounds 20 a year in interest alone, says Barclaycard, and this will rise to pounds 50 for a customer spending pounds 500 a month and avoiding the pounds 10 fee. Around 35 per cent of Barclaycard holders will benefit from the reduced interest rates, and 20 per cent from the fee waiver.

Barclaycard's managing director, John Eaton, also went on to the attack by criticising rival cards that offer consistently lower interest rates and do not charge an annual fee, pointing out that many of them impose what Barclaycard calls "hidden" charges for late payments, exceeding personal spending limits and requesting duplicate statements or voucher copies, all of which are free at Barclaycard. Use one or more of those services each year, and you have more than wiped out the annual fee.

Borrowing on a Barclaycard will still be more expensive than the rates charged by some of the newer card companies, including MBNA and RBS Advanta, but the company will undercut their direct rivals' cards issued by other high street banks.

Rival banks have yet to respond, but if, as expected, Barclaycard halts the slow decline in its market share and starts to pick up new business from the other high street banks, it will not be long before they respond, and the traditional pattern of annual fees and uniform rates for all customers crumbles away.

Changes so far have been relatively slow, because of the great resistance to change which established card-issuers have cleverly exploited. Over the last few years, however, the number of competing credit cards has risen to an estimated 1,200 different cards. Almost all carry either the Visa, the Mastercard or the Access logo, which makes them widely acceptable abroad. But in the last five years niche players such as the Cooperative Bank, which charges low rates on unpaid balances but offers no interest- free periods between the date of purchase and payment, has increased its market shares. And a band of new entrants, including MBNA, RBS Advanta, a joint venture by the Royal Bank of Scotland and Advanta, People's Bank and Capital One, have taken an estimated 15 per cent of the market for main credit cards and even more of the market in second cards.

Most card holders now seem to have at least one alternative card, which in many cases is an affinity card issued by one of the new entrants such as MBNA on behalf of specialist groups such as Saga, which started life as a travel business for the over-55s, or Goldfish, the card launched in 1996 to allow card holders discounts on their gas bills.

Most of the newcomers broke into the market by abolishing the annual fees, by cutting monthly interest charges, or both. Recently the main come-on has been special low rates of interest for up to a year on unpaid bills, which appeals to those who perennially spend more than they intend to. Capital One is the current market leader, charging new card holders only 6.9 per cent APR on unpaid balances until the end of this year.

According to a recent poll by NOP, more than a quarter of people who took out a second card were attracted by a lower rate of interest on borrowing, against 17 per cent who said the absence of an annual fee was the main factor, and a similar number who were chiefly attracted by the ease with which the card could be taken out.

Card holders are also attracted by loyalty programmes such as Barclaycard's profile points, NatWest's air miles schemes, Vauxhall's cash discounts on new cars and Bradford & Bingley's cashback on new mortgages. Yet only 5 per cent say it was the main factor in their decision. According to NOP, 85 per cent of card holders had never redeemed any of the points they earned. Many secondary card holders took out cards in order to benefit a favourite charity, such as the RSPB or a local football club.

In spite of all the new activity, however, inertia has remained a strong factor in the credit card market; even today 60 per cent of card holders admit that their main card was issued by by one or other of the clearing banks, and almost half of them pay a monthly rate of at least 1.55 per cent (22 per cent APR) on unpaid bills. A quarter of all card holders admit they do not know what rate of interest they are paying on unpaid balances, and 60 per cent admit they do not pay off their bills in full, at least part of the time.

Two-thirds of all card holders who are conscious of having to pay an annual charge admit that pounds 10-pounds 12 a year is not a strong enough deterrent; although they may mean to apply for a new, fee-free card, they rarely get round to it. But if Barclaycard is selling the pass, other big card issuers may do the same, in which case many newer cards, including affinity cards with only a local following, will lose one of their main selling- points and may find themselves squeezed out of existence by the big battalions.