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
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Lego letter from the 1970s still offers a powerful message to parents 40 years later
- 2 To help fuel their propaganda machine against the poor, our government has now decided to redefine the word 'welfare'
- 3 Naked free runner captured in breathtaking photographs above London's streets
- 4 Woman opens professional cuddling shop – gets 10,000 customers in first week
- 5 Grayson Perry: London needs affordable housing because 'rich people don't create culture'
Rochester by-election: Ukip gains second MP as Tory defector Mark Reckless holds seat
'Beast of Bolsover' Dennis Skinner takes Ukip MP Mark Reckless to task moments after he is sworn in
Rochester by-election: Labour MP Emily Thornberry resigns after posting white van and England flags tweet
France 'blocks' Russian sailors from boarding a warship
The young are the new poor: Sharp increase in number of under-25s living in poverty, while over-65s are better off than ever
Green Party Caroline Lucas interview: 'We could be on the edge of something very big'
iJobs Money & Business
£50000 - £60000 per annum + benefits: Argyll Scott International: A Business A...
£30000 - £35000 per annum + benefits: Ashdown Group: PR Marketing & Events Exe...
$80000 - $110000 per annum, Benefits: Bonus and Employee Investment Scheme: Se...
€30000 - €50000 per annum, Benefits: Competitive Bonus: Selby Jennings: Java D...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens