Money Insider: Interest-free credit card deals may not be as good as they seem

 

The battle for credit card, best buy coverage in the zero per cent balance transfer market shows little sign of petering out any time soon.

In the past couple of weeks alone we've seen promotions for 26-month terms from Virgin Money and NatWest, only to be outdone by the long-standing leader in this field, Barclaycard, with its latest 27 months, interest-free, table topper.

The way things are going I wouldn't be surprised to see the 0 per cent term hit the 30-month mark before the end of 2013.

However, it's not all good news for consumers. These best-buy deals are only available to customers with impeccable credit records, plus the longer the 0 per cent term the bigger the balance transfer fee.

Another downside is that with some card providers, including Barclaycard and Halifax, you could end up getting offered a much shorter interest-free term than the headline-grabbing advertised deal implies.

It's already fairly well known that some card companies operate a personal-pricing policy whereby up to 49 per cent of successful applicants find themselves being accepted for a specific card but end up with a rate of up to 11 per cent higher than the advertised representative APR.

A practice that many people will be less aware of, unless they take a closer look at the credit card summary box information, is that a few card companies will offer a much shorter introductory 0 per cent term for some applicants – usually those with a smaller balance to transfer.

In a number of instances the 0 per cent term actually offered can be less than half of the headline deal shown in the best-buy tables. Although with personal pricing 51 per cent of successful applicants must be given the advertised rate, there's no such restriction on down-selling lower 0 per cent periods – it therefore begs the question how many people are fortunate enough to get both the advertised rate and headline 0 per cent term?

A worst-case scenario for someone who is accepted for the latest Barclaycard 27-month balance transfer deal, for example, is they end up with 12 months at 0 per cent and an APR of 29.9 per cent thereafter – an almost unrecognisable card compared with the headline 27 months and 18.9 per cent APR.

The longer the terms set for 0 per cent cards the more we'll see increased fees and down-selling of shorter terms. After all, there's no such thing as free money and it's just a simple case of economics as lenders try to find new ways to balance their books.

Regulation peril for peer-to-peer sectors

With interest rates paid on tradi- tional bank and building society savings accounts at record lows, it's no surprise that more people are looking at alternative ways to earn a reasonably good return on their savings.

One of the biggest growth areas in the past couple of years has been the peer-to-peer sector where attractive interest rates have seen business levels increase rapidly.

However, although the potential returns are in some cases more than double those offered on the high street, the lack of a recognised safety net such as the Financial Services Compensation Scheme has deterred some people from tak-ing the plunge in this alternative savings market.

RateSetter, launched in 2010, has operated a provision fund to protect savers (known as "lenders") from day one. The provision fund now stands at £1m and is used to cover any bad debts or late payments and so far has ensured lenders have not lost a single penny.

Zopa, the longest-established peer-to-peer player in the UK, introduced its own version of the provision fund in April known as Safeguard.

The main difference between Zopa and Ratesetter is that with the latter you can set the rates you're prepared to lend at whereas with Zopa the rates are set.

Both providers are currently offering five-year returns in excess of 5 per cent gross, and although this lending is not risk-free, it's comforting to customers to see providers going to such lengths to protect their savings.

With the sector due to be regulated by the Financial Conduct Authority from next April, it will be interesting to see if the watchdog accepts that the current arrangements are fit for purpose or whether it will insist on an even more belt and braces com-pensation-style scheme.

The slight cloud hanging over this booming industry is the potential threat of red tape and regulation and the associated costs this may bring.

A heavy-handed approach may increase safeguards for savers' cash, but at the same time could have an adverse impact on the attractive rates which are currently enjoyed by peer-to-peer customers.

Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk

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