Money Insider: Balance transfers can be wise – but tread carefully

 

With the UK economy barely out of recession and unemployment at a 17-year high, you'd expect credit card providers to be treading a more cautious line to prevent bad debts and write-offs from eating into their profit margins.

But according to the latest Moneynet research this doesn't appear to be the case, with plenty of 0 per cent promotional deals and the average interest-free balance-transfer term hitting a new record of 12.7 months.

In the period following the banking crisis in early 2009, the credit card market was understandably far less active with some lenders withdrawing from the market and fewer new products being launched.

At that time many of us assumed the 0 per cent balance transfer recruitment ploy would be a thing of the past, but we were wrong.

There are a number of factors why card providers continue to offer these record-breaking deals.

Historically, funding costs remain very low, plus the Consumer Credit Directive, which came into effect in February 2011, means that lenders can be more selective, as they only have to offer the best deals to 51 per cent of successful applicants compared with the previous requirement of 66 per cent.

With around £57bn outstanding on credit cards there are still opportunities for card providers to pick up business from their rivals; one of the reasons some are upping the ante to try to tempt us to switch allegiance.

Offering long-term 0 per cent deals is also a very cost-effective way of generating massive free advertising exposure via the newspaper and online best buy tables. Why spend thousands on a half-page advert when simply tweaking the terms and conditions of your product can deliver similar or even better results?

The downside for consumers is that even though lower borrowing costs have allowed providers to offer extended interest-free terms, once the promotional deal expires the revert to interest rates remain stubbornly high, currently around the 18 per cent APR mark.

Some existing customers have seen their borrowing rates increased as their card company now views them as more of a risk compared with when they first applied for their card. That's a bitter pill to swallow if you're already struggling to make inroads into your credit card balance.

Also, if any consumers on a 0 per cent deal happen to be late with or miss a monthly repayment, even if it is their first slip up, they will in many cases, see their interest-free offer terminated immediately.

The rates at the end of the interest-free deal can vary enormously, for example with the 15 month 0 per cent purchases deal from M&S Money the representative APR reverts to 15.9 per cent. Meanwhile, with the Classic Credit Card from Post Office, the go-to rate is well above the market average at 19.9 per cent APR.

As well as being able to be more selective in who they lend to, card companies can also offer smaller credit limits so even though the 0 per cent market may appear to be thriving, the overall amount of money available via these deals is likely to be lower than it was a few years ago.

If your credit record is in good shape you'll find plenty of takers for your existing debt, however, in many cases the size of the credit limit many not be as much as you were hoping for or sufficient to cover your existing balance(s).

If your credit rating is not up to scratch then your experience is likely to be far less positive and you may find your application for these introductory offers declined or that you'll be offered a card but at a much higher rate of interest.

While lenders still want new business and some "rate tarts" are still looking to switch their balance on a frequent basis, the goalposts have undoubtedly moved and a greater proportion of consumers will see their application turned down.

The latest data reveals that there are now 51 credit cards offering an interest-free balance transfer term of 12 months or more, with the longest terms currently available from Barclaycard Platinum and Halifax at 22 months. Meanwhile NatWest and Virgin Money Bank both offer interest-free deals for 20 months.

Despite UK card companies writing off over £13bn in bad debts in the last three years "free plastic" looks set to be here to stay for the foreseeable future.

If you use your cards wisely it can be a great way to manage your finances, but for those who can't resist the temptation to spend on their new 0 per cent flexible friend, a bigger and more expensive headache is waiting round the corner.

Andrew Hagger – Moneynet.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Arts and Entertainment
theatreSinger to join cast of his Broadway show after The Last Ship flounders at the box office
News
Valerie Trierweiler’s book paints Hollande as a cold-hearted hypocrite
people
Arts and Entertainment
Jennifer Lawrence as Katniss Everdeen in The Hunger Games: Mockingjay Part 1
filmsMockingjay Part 1 taking hit franchise to new levels
News
Bill Cosby
peopleActor has firmly defended himself against all claims
Arts and Entertainment
Carey Mulligan as Bathsheba Everdene in Far From The Madding Crowd
filmsAlso much to look forward to for Thomas Hardy fans
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Argyll Scott International: Business Analyst - MGA - London Market - Insurance Broker

    £50000 - £60000 per annum + benefits: Argyll Scott International: A Business A...

    Ashdown Group: PR, Marketing & Events Executive - Southwark, London - £35,000

    £30000 - £35000 per annum + benefits: Ashdown Group: PR Marketing & Events Exe...

    Selby Jennings: C++ Developer – Hedge Fund – New York

    $80000 - $110000 per annum, Benefits: Bonus and Employee Investment Scheme: Se...

    Selby Jennings: Java Developer Enterprise Specialist –Paris,France

    €30000 - €50000 per annum, Benefits: Competitive Bonus: Selby Jennings: Java D...

    Day In a Page

    In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

    Iran is shifting from pariah to possible future policeman of the Gulf

    Robert Fisk on our crisis with Iran
    The young are the new poor: A third of young people pushed into poverty

    The young are the new poor

    Sharp increase in the number of under-25s living in poverty
    Greens on the march: ‘We could be on the edge of something very big’

    Greens on the march

    ‘We could be on the edge of something very big’
    Revealed: the case against Bill Cosby - through the stories of his accusers

    Revealed: the case against Bill Cosby

    Through the stories of his accusers
    Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

    The Meaning of Mongol

    Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
    Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

    Kenyans still waiting for justice over Mau Mau uprising

    Thousands join class action over Britain's role in the emergency
    Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

    The last Christians in Iraq

    After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
    Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Britain braced for Black Friday
    Bill Cosby's persona goes from America's dad to date-rape drugs

    From America's dad to date-rape drugs

    Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
    Clare Balding: 'Women's sport is kicking off at last'

    Clare Balding: 'Women's sport is kicking off at last'

    As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
    Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

    Oh come, all ye multi-faithful

    The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
    Dr Charles Heatley: The GP off to do battle in the war against Ebola

    The GP off to do battle in the war against Ebola

    Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
    Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

    Flogging vlogging

    First video bloggers conquered YouTube. Now they want us to buy their books
    Saturday Night Live vs The Daily Show: US channels wage comedy star wars

    Saturday Night Live vs The Daily Show

    US channels wage comedy star wars
    When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

    When is a wine made in Piedmont not a Piemonte wine?

    When EU rules make Italian vineyards invisible