Money insider: Interest-free credit cards at a record high

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The Independent Online

With the British economy still in a fragile state and government spending cuts yet to bite, you probably wouldn't be the only one to expect that credit card providers would be adopting a cautious strategy to avoid getting their fingers burned again by bad debts and write-offs.

Not surprisingly, in the post banking crisis era the credit card market in 2009 was much quieter with fewer new products being launched, and many of us wondering if the 0 per cent balance transfer recruitment ploy was soon to be a thing of the past.

However, new research from Moneynet reveals the complete opposite, with long-term 0 per cent deals more widespread than they've ever been.

The latest data reveals that there are now 54 credit cards offering an interest-free balance transfer term of 12 months or more, the highest on record, with the average term of a 0 per cent deal also at a new high of 12.16 months, up sharply from just 9.87 months a year ago.

There are, however, a number of factors in the card provider's favour enabling them to offer these record-breaking deals.

Not only are borrowing costs virtually at an all time low, the Consumer Credit Directive which came into effect on 1 February 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 £58.2bn outstanding on credit cards, according to the Bank of England, there are still plentiful opportunities for card providers to pick up business from competitors, hence the reason that more and more providers are upping the ante to try to tempt us to switch allegiance.

Offering long-term 0 per cent deals is also an effective way to generate 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 enabled providers to offer extended interest-free terms, once the promotional deal expires the revert to interest rates remain stubbornly high.

The rates at the end of the interest-free deal can vary enormously, for example with the 17-month 0 per cent deal from Nationwide Building Society the representative APR is 15.9 per cent, whereas with the Classic MasterCard 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 providers can also offer smaller credit limits thus enabling them to keep the cost of interest-free lending to a minimum. Also, if consumers happen to be late with or miss a monthly repayment, even if it is their first slip-up, they will see their interest-free offer terminated immediately.

Three years ago there were 80 0 per cent balance transfer card on the market of which 39 were for a term of 12 months or more, however in the midst of the economic down turn one year later, the number of 0 per cent cards plummeted to just 52 with only 24 being for one year plus.

Today there's a choice of 74 deals offering you the chance to switch to a 0 per cent card with 54 of these for 12 months or more, so the appetite for new business has certainly perked up.

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 you'll be offered is likely to be much smaller than you'd have seen a couple of years back.

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

Whilst 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 longest terms currently available include Barclaycard Platinum with a record-breaking 20 months, while MBNA, Virgin Money, Bank of Scotland and NatWest all offer deals of 18 months.

"Free plastic" looks set to be here to stay for the foreseeable future, and used wisely can prove a great way to manage your finances, but for others who can't resist the temptation to spend on their new 0 per cent flexible friend, a bigger and more expensive headache awaits.

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