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
News
REX/Eye Candy
science
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Extras
indybest
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
tech
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
News
i100
News
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
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

    C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

    £40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

    C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

    £45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

    DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

    Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

    Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

    £50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

    Day In a Page

    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone
    Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

    What is the appeal of Twitch?

    Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
    Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

    How bosses are making us work harder

    As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
    Manufacturers are struggling to keep up with the resurgence in vinyl records

    Hard pressed: Resurgence in vinyl records

    As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
    Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

    A tale of two writers

    Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
    Could a later start to the school day be the most useful educational reform of all?

    Should pupils get a lie in?

    Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
    Prepare for Jewish jokes – as Jewish comedians get their own festival

    Prepare for Jewish jokes...

    ... as Jewish comedians get their own festival
    SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

    A dream come true for SJ Watson

    Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
    10 best cycling bags for commuters

    10 best cycling bags for commuters

    Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
    Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

    Paul Scholes column

    Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
    Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

    Kate Bush shows a voice untroubled by time

    A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
    Robot sheepdog technology could be used to save people from burning buildings

    The science of herding is cracked

    Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
    Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

    This tyrant doesn’t rule

    It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?