Outlook: Credit cards

YOUR STARTER FOR 10. You have a choice of two credit cards: one, from Capital One Bank, levies a fee of 11.9 per cent APR on its accounts. The other, from Barclaycard, charges 19.9 per cent APR. Otherwise there is little to differentiate the two, apart from the fact that one is better known than the other.

That, in a nutshell, is the problem faced by Barclaycard, which announced yesterday that it is cutting the rate it charges holders of its card by 1 per cent from its previously-extortionate levels. The news, while no doubt welcome to Barclaycard's seven million customers, is unlikely to reverse the growing trend towards cheaper and more com- petitive issuers.

Whereas even a decade ago, Barclaycard's dominance of the market meant huge profits for its parent, Barclays Bank, the same no longer applies today.

Advances in technology make it far easier for new entrants to deliver competitive products. In the past three or four years a clutch of new issuers, particularly from the US, have launched cards which charge as little as half the amount Barclaycard does.

In the past, Barclaycard could point to the fact that the vast majority of its cardholders, two-thirds or more, paid off their debts at the end of each month. They therefore incurred no charges, extortionate or otherwise, and the meantime benefited from Barclaycard's loyalty points system.

But times have changed. Surveys show that the proportion of cardholders who pay their debts off in full each month has dropped to 50 per cent. Up to a quarter carry their balance (another name for debt) indefinitely, making minimum payments and rolling over the rest. Users' increased willingness to manage rather than pay off their card debt means low-charging issuers are bound to become winners in the credit card war.

Barclaycard has applied all the usual tricks to inspire loyalty, but in the end the offer of a free toaster to those silly enough to run up debts of pounds 3,000 on their credit card won't help much if such a debtor is paying pounds 300 a year more than he or she needs to for the loan.

Moreover, whereas once upon a time a Barclaycard was one of the few means available to pay for something in a shop without cash, the same no longer applies today.

Debit cards which simply deduct the money from a bank account are now commonplace. Flexible mortgages, particularly those which come as part and parcel of a bank account, complete with credit card linked to the prevailing mortgage rate, are growing in popularity.

The fragmentation of the credit market means greater competition and lower profits for everyone, including Barclaycard. Its inability to respond in time has already led to 1,500 redundancies for its staff in the past few months and a slump in market share. Yesterday's rate cut will do little to halt the erosion in Barclaycard's position. It was both too little and too late.