Many consumers are struggling to understand the true cost of balance transfer credit card deals which offer enticing 0 per cent interest rates, research by Which? suggests.
Fewer than one in 20 (4 per cent) people were able to correctly work out how much a balance transfer would cost in a test by the consumer group.
The findings raise concerns people are concentrating on the interest-free periods being offered, without taking full account of any charges for transferring the balance over to the new card. Which? wants the Financial Conduct Authority (FCA) to take a closer look at balance transfer deals.
In the test, Which? asked more than 2,000 consumers to assume a debt of £2,400 would be placed on a card with a balance transfer deal and the balance would be interest-free for a period of 25 months.
The debt would be paid off within 24 months, before the end of the deal period. They were told to assume that no extra spending would be made on the card. They were also told that there would be a balance transfer fee of 1 per cent.
Only 4 per cent of people correctly said that the 1 per cent balance transfer fee would incur a cost of £24. Seven in 10 (68 per cent) wrongly thought the transfer would be completely free.
Which? also asked people to compare five credit card deals and pick the cheapest for someone who wanted to make a balance transfer but who would not use the card for spending.
Only one third (34 per cent) chose the correct card, while another third (35 per cent) wrongly picked the one with the lowest APR, which had a higher balance transfer fee and would have cost more than three times as much as the cheapest deal, at £123.02 against £33.
Which? estimates consumers pay around £334 million in balance transfer fees each year.
It has submitted its evidence to the FCA and wants the regulator to look at balance transfer fees as part of its investigation into the credit card market, in order to help people pick the best card for their needs.
The consumer group, which is running a “stop sneaky fees and charges” campaign, is urging the FCA to look at whether fees should be shown as a cash sum rather than a percentage, or consider banning firms from advertising deals as “0 per cent” when there is a fee.
Which? executive director Richard Lloyd said: “Too many credit card deals appear to include sneaky fees designed to catch customers out. With millions now using credit cards to pay for essentials, it’s vital that the Financial Conduct Authority takes action to ensure consumers are well protected.
“We want the regulator to scrutinise balance transfer deals and make it easier for people to understand their true cost.”
Tips from Which? to help work out which credit card is right for you include: Checking your credit rating. If you have a poor or limited credit history, there are cards designed specifically to build your credit rating. These are likely to have lower credit limits and higher interest rates, but they can help you get better deals in the future.