Money Insider: Balance transfers can be wise – but tread carefully
Saturday 31 March 2012
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
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