Consumers with low-rate credit cards are enjoying a free ride thanks to the decision by many card issuers to absorb interest rate increases.
And with some credit cards still as low as 8.99 per cent, debt laden consumers are rolling their balances over from other cards, and issuers, to the cheaper products.

The Reserve Bank raised its cash rate 25 basis points to 5.75 per cent in May and a further 25 basis points to 6 per cent in August.
Following the decision by several issuers of low-rate cards to hold their rates steady in the wake of the 50 basis point increase, the gap between the rates charged on low-rate credit cards and the fully featured alternatives has widened

One card issuer, Suncorp, even dropped its interest rate from 11.9 per cent to 9.95 per cent. (Unlike the others it has no free days.)

St George Bank's Vertigo card and BankWest's Lite MasterCard maintained their rates after the last rise - both are 8.99 per cent. The Bank of Queensland has left its Low Rate Visa Card at 9.99 per cent. The Commonwealth Bank has left its Yellow Card at 10.99 per cent and Virgin left its rate unchanged at 12.65 per cent.

Compared to these rates, most popular full-featured cards now have rates of more than 18 per cent.

The Amex Blue Card has a rate of 18.24 per cent, ANZ's Frequent Flyer Visa has a rate of 18.99 per cent, GE Money's Coles Myer Source Card is 18.5 per cent and Commonwealth Bank's Platinum card is 18.65 per cent.

Unlike the issuers of low-rate cards, issuers of fully featured cards have moved their rates in line with Reserve Bank changes this year.
"It comes down to competition," says Geoff Austin, the Commonwealth Bank's executive general manager of retail banking services and lending products. "The decision to take a low-rate card is driven almost entirely by the rate. People choosing other cards are not so sensitive to rates. They are looking at rewards programs, features for overseas travel and other parts of the package."

The head of cards at BankWest, Richard Shepherd, says: "There is only one reason people choose low-rate cards. We have taken the opportunity to differentiate ourselves in a very competitive market."

The Virgin Credit Card was launched in May 2003 with a deal that included no fees, a 4.9 per cent introductory rate and balance transfer rate and an ongoing rate of 11.9 per cent. The card captured a 4 per cent share of the credit card market, with 600,000 cards on issue, making it one of the most successful new consumer finance products in some time.
In January, Virgin Money announced that it would make its card more competitive to increase its market share. The introductory and balance transfer rate was dropped to zero and a rate of 3 per cent was available for three months on purchases over $500.

Denis Orrock, the general manager of the banking industry research company infochoice.com.au, says low-rate cards are a fast-growing segment of the consumer finance market but an intensely competitive one.
"There are about 30 cards with rates below 12 per cent," he says. "For consumers it is a good deal."

He says the low-rate credit card market is one area in consumer finance where small institutions are leading the way and forcing the big banks to respond. "The Melbourne credit union Mecu has a credit card with a rate of 8.24 per cent. That is about as good as you could do with a secured personal loan."

Orrock says consumers should watch for higher annual fees, over-limit penalties or late payment charges as a quid pro quo for interest rates remaining unchanged. He is not aware of any low-rate card issuers bringing in new or higher charges in recent months.

Austin says the Commonwealth Bank has not received any complaints from holders of fully featured cards about the bank's decision to treat low-rate card holders differently.

"Customers with gold cards are not nearly so sensitive about interest rates," he says. "And if they are worried they can switch to a card with a lower rate."

Shepherd agrees: "[BankWest gives customers] the opportunity to refinance out of a high-rate card if they want."

He says BankWest's credit card balances have grown 40 per cent this year and the Lite MasterCard accounts for a substantial portion of that growth. "Consumers are aware of the low-rate option and many of them are choosing it," he says.