The Christmas credit card wars have started early this year with four banks offering promotional interest rates as low as 2.99 per cent to attract new customers.

Kiwibank, ANZ, National Bank and BNZ are all offering 2.99 per cent to people who take out one of their credit cards. The offer applies when people transfer an existing balance from a credit card provided by a rival provider.

Kiwibank has also upped the ante by offering the 2.99 per cent rate to selected existing customers who already have a Kiwibank credit card that they don't use much.

Credit cards are a lucrative part of the business mix for banks.

According to the Reserve Bank, the average interest rate charged on credit cards is 19.6 per cent, compared with just 11.8 per cent on all forms of personal lending

The Reserve Bank figures also show that New Zealanders owed about $5.6 billion on their credit cards at the end of July, of which about $3.6b was interest bearing.

Based on those numbers, credit cards would generate about $631 million in total interest revenue for the banks each year. On top of that would be revenue from credit card fees and any share of credit card commissions paid by merchants when accepting credit card payments.

With so much money at stake it is not surprising that competition among the banks for credit card business is intense. That has been heightened by another factor which has come into play over the past few years - a trend for credit card holders to exploit the interest-free period on their cards by spending more on them but paying the balance off by the due date, denying the banks the opportunity to charge interest on the purchases.

Reserve Bank figures show that the non-interest-bearing portion of credit card debt grew at five times the annual growth rate of interest-bearing debt last month.

One of the ways the banks have responded to that environment has been to increase credit limits.

According to the Reserve Bank, aggregated credit card limits (the total amount every credit card holder in the country could spend if they maxed out their cards) were declining from August 2009 until June 2010, but then began to increase steadily and since June have been rising by 4.3 per cent a year (see the graph), something that's likely to encourage many credit card holders to spend more.

However, discounted interest rates are one of the most common promotional tools banks use to attract new credit card customers.

Kiwibank spokesman Bruce Thompson described the 2.99 per cent balance transfer offer as a "loss leader", a rate that was so low that the bank would lose money on the deal.

"It's a promotion specifically designed to grow market share," he said.

While most banks regularly run such promotions to try and pinch each other's customers, offering the same deal to existing customers is far less common.

Kiwibank has reduced its credit card interest rate to 2.99 per cent for some, a group it describes as "high-value customers".

The offer applies to items purchased between the beginning of this month and end of January next year, and will give them up to six months to pay off their purchases at the reduced rate.

Thompson said the deal was offered to people the bank considered high-value customers who, for one reason or another, didn't use their Kiwibank credit card much.

Often that was because they had several cards and mostly used one that had been issued by a rival bank.

"It's what we regard as a selected category of a good customer with passive use of a credit card, which could indicate you use another credit card or are not getting as much benefit out of the card as you could," Thompson said.

"So we'll offer a very low interest rate and, by that, encourage you to look at the use of the card and see if it could be of greater value to you."

"That doesn't mean we are trying to get you to debt-load. But you are possibly not using that card to best effect."

- © Fairfax NZ News