Low rates may be considered as a gift, but be careful and pay attention to the small print to prevent getting into larger debts.
A great part of the people who do their best to go through the following two weeks of never ending spending may want to spread the cost with a 0% credit card. Most analysts in the field report that nowadays the race for the most profitable terms is hotter than ever.
The Moneyfacts’ finance expert Rachel Springall says that the median balance transfer fee became less during the past couple of years – from 2.55% to 2.29%. The term of the 0% balance transfer deal has become higher, from about 471 days to about 637 days.
Some of the cards even offer 0% credit cards with such an interest given for three years. Halifax, Virgin Money and Nuba have the longest deals at 41 months, closely followed by Sainsbury’s Bank, Tesco Bank and Lloyds at 40 months.
The interest-free period on purchases has also been getting longer. According to figures from Moneycomms, the financial analysis group, the number of cards offering interest-free purchases for at least 20 months has gone from 1 to 18 in the past two years. Within the same period, the maximum term on zero per cent purchase cards has risen from 20 to 30 months, and Moneycomms predicts this will reach 36 months before long.
This battle for custom means many of us will be enticed by an interest-free deal that gives us years to cover the cost of Christmas or to repay our debts. However, there are real risks and the less financially savvy should proceed with caution.
I would like a zero per cent credit card. What’s the catch?
Andrew Hagger, a personal finance analyst and founder of Moneycomms, says: “The balance transfer fee is frequently the element of a card that helps to pinpoint the best deal. With the zero per cent purchase cards there is no corresponding one-off fee, so consumers need to consider other card attributes when selecting their plastic of choice. This includes looking at the reward scheme/cashback, maximum interest-free days and the ‘revert to’ or ‘go to’ interest rate that kicks in once the zero per cent promotional offer expires.”
Note that many rewards providers have cut the reward earn rates or ditched their schemes because of the costs of EU legislation to cap credit-card transaction fees. John Lewis (partnership card), Nationwide Building Society and Sainsbury’s Bank, however, have maintained their reward rates of two years ago.
Are there other risks?
A credit card with a 40 or 41-month interest-free term is probably not the most suitable or financially beneficial if you can afford to pay the debt back sooner. You should avoid spending on balance transfer cards because the zero per cent rate usually won’t apply to purchases as well as the transfer. (Often it will be better to have two separate cards.)
Many people fall foul of the terms of their deal. It’s important to keep track of when monthly payments are due and when the zero rate ends. The increasingly long interest-free periods mean that it is easy to lose focus on repaying your debt and then have to pay heavy penalties. That’s when lenders hit the jackpot: many will withdraw the deal if you default on a payment and leave you with an expensive rate. Research last year from the Fairbanking Foundation, a research charity, found that almost a third of borrowers who had taken out a zero per cent credit card since 2010 ended up with higher debts.
Ms Springall points out that people with a poor credit history, or no credit history at all, could struggle to get a lucrative card when they are assessed for credit.
“It’s worthwhile taking the time to run a credit report, such as with Experian, and find out what debts you have and how much you can borrow on existing cards as a priority. If you don’t want to borrow on your existing card, you would be wise to close it down before you apply for more credit.”
When must I pay off the debt?
You should try to clear your card within the zero rate period because after it ends the interest rate will rocket — typically to 18.9 per cent — effectively cancelling out the benefits you’ve reaped. Set up a direct debit to pay off the debt. The minimum monthly payment must be consistent: don’t assume that a standing order will suffice because you don’t get notifications if a payment has failed and there’s a danger you could underpay one month, as one Times reader discovered (see Troubleshooter on page 68).
Can I keep shifting my balance?
Many people do move from deal to deal, but it’s rarely an efficient or sensible way of managing your money. Mr Hagger says: “If you’re switched on and very organised, you could make a saving, but you wonder how many people are pushing their money around because they can’t afford to repay it. You’ve got to remember that at some stage, you’re going to have to pay it off.”
Applying for too many credit cards or constantly switching can also damage your credit score.
‘My time as a zero per cent floozy’
A £1,000 Arsenal season ticket and a £500 flight to Jamaica had me in debt for a decade, but I have just paid off my credit card balance after ten years shifting it from deal to deal.
It’s a relief not to have the stress every 14-18 months of remembering when the zero per cent interest period ends, then searching for the next one and worrying about the application process. Someone once told me that “interest-free credit cards are the best debt to have”, and it seemed handy for me, a decent earner, but always in the minus. I paid the minimum payment allowed each month. I followed the rules: didn’t spend or withdraw. The balance, though, never seemed to decrease.
The transfer fees seemed worth it, although over the lifetime I paid nearly £300. (Cheaper than interest, I reasoned.) Being a zero per cent floozy became a lifestyle choice, but there were a few hairy moments, such as being rejected for a card and worrying about my credit score.