Cheap plastic leads us into temptation

Enticed by credit cards trumpeting 0 per cent interest? Then use them to cut your debt, not increase it, says Melanie Bien
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The Independent Online

Demand from consumers for credit cards charging 0 per cent interest for several months shows no sign of diminishing.

Demand from consumers for credit cards charging 0 per cent interest for several months shows no sign of diminishing.

Sainsbury's Bank last week announced it is continuing its 0 per cent introductory rate, which runs for nine months, owing to customer demand. The supermarket bank had planned to withdraw the offer earlier in the week.

Barclaycard is the latest provider to offer a 0 per cent introductory period on balance transfers and new purchases, which runs until August 2005 - the longest on the market. The company has been inundated with applications following a high-profile ad campaign starring the Hollywood star Jennifer Aniston, and has only recently been able to clear the backlog.

"We had more applications than we thought we'd get," says a spokesman. "But we are now turning them around within two weeks."

While it is encouraging to find people shopping around for a cheap card, not all of them are doing so for virtuous reasons.

Many consumers see a 0 per cent offer as "free" cash that doesn't have to be repaid until a much later date. But if they don't put money aside to clear their credit card bill when the 0 per cent period comes to an end, they could find themselves in worse debt than before.

"I don't doubt that some people, who are quite extended already in terms of debt, will switch to a 0 per cent card and think they only have to cover the minimum payment," warns Stuart Glendinning, director of credit cards at moneysupermarket.com, a website that allows consumers to compare the cost of financial products. "They won't worry about the interest and will run up further debt."

Clever consumers use 0 per cent introductory offers to reduce their debts. Say a customer owes £1,000 on a credit card and has been paying £50 a month towards it; a large chunk of this would have gone towards paying the interest. But if the debt is transferred to Barclaycard and the customer continues to pay £50 a month, all of this will go towards settling the balance because no interest is incurred.

This will enable the customer to clear the balance more quickly. Even if they haven't managed to do so by the end of the offer period, by switching to another card offering 0 per cent they can continue to chip away at what they owe.

Those customers who clear their credit card balance at the end of each month can still benefit from 0 per cent interest on new purchases. Instead of paying off their balance in full as usual, they can put the equivalent amount into an instant-access savings account paying the highest rate of interest they can find.

At the end of the introductory period, they use these savings to pay off the balance on their credit card, so they don't incur any interest. Having earned interest on their savings, they will actually have made a profit.

However, for every person using their card sensibly there are bound to be others who won't. With debt set to top the £1 trillion mark in the next few days, according to the Bank of England, millions are overstretching themselves. Meanwhile, interest rates are on the way up, causing more problems.

Concern over spiralling debt is forcing the Government to seek changes to the Consumer Credit Act. It is calling for credit card statements to carry a warning that customers making only the minimum monthly payment will end up paying more interest. It also wants card providers to run a credit check on customers before extending their limit.

Consumers can protect themselves by noting when their 0 per cent offer ends and moving to another card offering a similar deal. Otherwise they'll pay the provider's standard annual percentage rate. This is at least 13.9 and 15.9 per cent for Barclaycard and Sainsbury's Bank customers respectively, depending on their credit rating.

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