Will the 0% credit-card madness ever end?

The latest best-buy topper from Barclaycard lasts for a staggering three years

Andrew Hagger
Friday 20 February 2015 21:00
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The battle to offer the longest 0 per cent duration for credit-card balance transfers rages on, with yet another high-profile deal just launched. The latest 0 per cent best-buy topper from Barclaycard lasts for a staggering three years and puts the pressure on rivals Halifax, Tesco Bank, MBNA, HSBC and Sainsbury's.

Some may question why providers are still pushing 0 per cent cards. However, in December alone, there was £1bn switched to interest-free plastic and with Barclaycard charging a balance-transfer fee of 2.99 per cent, even if it only got a quarter of that new business (£250m), it would net £7.48m in fees.

According to the latest British Bankers' Association statistics, there is £60.35bn outstanding on credit cards (the highest amount since February 2011) and 42.9 per cent of this is sitting on interest-free cards. That 42.9 per cent interest-free slice equates to borrowing of £25.891bn.

With NatWest/RBS already pulling out of introductory deals on credit cards and the FCA undertaking a credit-card market study, it begs the question as to what would happen if 0 per cent deals were suddenly banned or phased out.

If the money was charged at the average rate of 18 per cent APR, it would cost borrowers a collective £4.66bn in interest over the course of a year, or £388m per month. The best they could hope for would be to transfer it to a standard low-rate card – for example MBNA's at 6.6 per cent APR – but the interest cost would still amount to £1.71bn per year or £142m per month.

A credit card used to be considered as a tool to help you cope with the unexpected, such as a car breakdown, but now for many they are frequently seen and used as a long-term loan. What we don't know is how much of that £25.891bn is interest-free because cardholders are being smart with their finances and how much is related to borrowers who are struggling to make repayments and are continually moving their debts around. I fear a bigger slice is down to the latter.

If you are financially disciplined, there are some good savings to be made, but the potential financial costs of these cards can be high if they aren't managed properly. The problem, and something card providers rely on, is that many people fall off the 0 per cent wagon mid-term and end up incurring hefty interest charges. If you are accepted for one of these products, make sure you don't exceed your limit or miss a monthly payment as lenders use this as a handy get-out clause to terminate the introductory deal.

Another tip for savvy borrowers is not to opt for the card with the longest interest-free period unless you plan to use it for the full term. It is not uncommon for customers to switch to 0 per cent and then switch away again or repay the balance well before expiry, so for many people the balance-transfer fee is also a key area to consider. The one-off balance-transfer fee is much cheaper if you opt for a term which is slightly shorter than the table topping cards. For example, the Santander 123 Credit Card and Halifax 0 per cent Card offer 23 months and 13 months free respectively and neither charges a balance-transfer fee.

Our reliance on credit in the UK is increasing rapidly and that's partly to be expected as the economy improves and consumer confidence grows, but you start to wonder where all this obsession with 0 per cent transfers will end.

Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk

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