Lenders zero in on credit card transfers, but are consumers too indebted?

Balance transfer cards are designed to give people time to repay their debts, but not all borrowers can do so before the interest-free period ends

The 41-month 0 per cent balance transfer card introduced by Virgin Money last week is the longest on record, beating recently launched 40-month offers from lenders including Halifax, Sainsbury’s Bank and MBNA.

The new Virgin card has a 4 per cent fee for transferring debt from an existing credit card or moving money to a current account within 60 days of opening the account, rising to 5 per cent after 60 days, significantly higher than the fees on other cards.

With Lloyds, Bank of Scotland, Barclaycard and Tesco Bank all promoting 0 per cent introductory balance transfer rates of 37 months or longer, there are concerns that banks are again encouraging customers to take on more debt than they can afford.

Consumers are already taking on unsecured debt at the fastest rate for a decade, The Money Charity has reported, while the £1.3 billion spike in consumer credit recorded by the Bank of England for April was the second fastest rate of increase since December 2005.

More than 40 per cent of the £61.26bn currently outstanding on credit cards is accounted for by 0 per cent purchase and balance transfer promotions, according to Andrew Hagger, personal finance expert at Moneycomms.co.uk.

If the £26.3bn on those cards was charged at the average interest rate of 18.9 per cent the repayments would cost borrowers £13.6 million pounds per day, or an eye watering £4.97bn a year, he pointed out.

“The numbers are staggering and the concern is that nobody really knows how much of this £26.3bn interest-free balance is being managed by people being smart with their finances compared with those struggling to make ends meet and simply using it as a means to keep their heads above water,” said Hagger.

Why are lenders so keen to compete in this market? The simple reason is that they know plenty of customers will stay put when the offer period ends.

“You have to question why lenders continue to offer long term interest- free credit, but they undoubtedly factor in that a certain percentage of borrowers will miss a payment or exceed their credit limit – thus falling off the 0 per cent wagon and straight on to a rate of 18.9 per cent APR or more,” said Hagger. “Ultra long 0 per cent deals may work while the economy and employment figures are strong, but when the next downturn comes there will be financial pain for borrowers and lenders alike – it’s like waiting for that first domino to fall.”

The 18.9 per cent rate on to which borrowers are typically shifted at the end of the 0 per cent period compares with the 6.4 per cent interest charge on the cheapest credit card currently available.

If you borrow £4,000 on a card charging 18.9 per cent APR you’ll pay £1,097 in interest and your debt would take two years and ten months to clear if you repaid £150 each month. If you borrowed the same amount at 6.4 per cent you’d save yourself £780 in interest charges.

While balance transfer cards are designed to give people significant periods of time to repay their debts interest free, the reality is that not all borrowers can do so before the interest-free period ends.

“Most cards charge a balance transfer fee to move debts around each time and not all customers will keep a diary note of when interest will start to be charged and by how much,” said Rachel Springall, spokeswoman at Moneyfacts.

“Lenders are keen to attract new customers and with a war raging in this area of the market these providers have moved on to offering money transfers as another way for customers to borrow. Instead of clearing a credit card, a money transfer credits a bank account.”

Some banks have also returned to the once-rife practice of unsolicited credit limit increases. Almost two-thirds of cardholders have had their limit raised without them requesting it, uSwitch research found earlier this year. “Lenders will call this ‘flexibility’, but we all know it’s not done with the cardholder’s best interests at heart,” Hagger noted.

One of the long-term risks of using credit cards is that borrowers can become too comfortable with debt.

“Certain measures, such as stopping automatic credit limit rises and alerting customers when deals end, could help borrowers manage their debt,” said Springall. “Another helpful feature would be for card providers to encourage borrowers to pay more than the minimum repayment each month.”

The Financial Conduct Authority’s long-awaited study of the credit card market is expected to be published this week.

In its interim report last November, the regulator expressed concerns over both the increase in the number of 0 per cent balance transfer cards available and the length of the terms offered. It said consumers may not always understand the fees they could incur and suggested that balances that are currently interest-free could be storing up future debt problems.

“We expect firms to be clear about the fees associated with such deals, and are keen to find ways to help consumers assess and compare the total cost of credit on such deals,” said the report.

There are similar misgivings in Australia over the widespread use of 0 per cent balance credit cards, with one senior executive at the country’s Commonwealth bank last year calling for a blanket ban on the cards.

However, the Australian government’s proposed reforms of the market stop short of taking action against the practice.