Credit card companies face a crackdown on interest-free offers after it emerged more than half of borrowers have no idea what rate they will pay when the deal expires.
There are now 117 credit card deals that charge no interest on debts switched from another card – with Barclaycard and Tesco Bank offering a rate of 0 per cent on balance transfers for up to 40 months and Santander 43 months.
But when these deals come to an end the rate typically jumps to around 19 per cent – although Capital One, Aqua and Marbles have credit cards where the APR hits 34.9 per cent.
Tempting: There are now 117 credit card deals that charge no interest on debts switched from another card
With the City watchdog poring over the credit card industry in the UK – including an explosion in the teaser rates used to lure in customers – a senior British banker has warned that millions of borrowers may be unaware of the punitive rates they face when their deals come to an end.
‘We thought it was a bad customer product when we surveyed our customers and over half of them didn’t know the interest rate they were going to be switched into at the end of the zero balance period,’ said Ewen Stevenson, chief financial officer at Royal Bank of Scotland.
The bank stopped providing zero balance transfers and teaser rates on its credit cards three years ago – and predicted that the entire industry faces a clampdown by regulators.
‘We still think it’s a bad product,’ said Stevenson. ‘We think at some point, if it’s a bad product, it carries undue conduct risk. That, to us, would be an obvious product to see some intervention on.’
Call me old fashioned, but I want customers to pay us back
RBS chief executive Ross McEwan
RBS chief executive Ross McEwan has also sounded the alarm over the boom in interest free credit cards – with some in the industry seeing them as a ‘ticking time bomb’ that could blow up in the face of lenders and borrowers.
‘Call me old fashioned, but I want customers to pay us back,’ he said. ‘I am objecting to having customers trapped on zero balance and not paying their debts down. I’m objecting to customers getting caught with rates that shocked them at the end of the day.’
British families owe a record £68.7billion of credit card debt, according to the Bank of England, up from £55.4billion five years ago.
Senior official Alex Brazier, the Bank’s director for financial stability, recently warned that lenders are in danger of entering a ‘spiral of complacency’ as they ramp up lending to debt-ridden households.
The FCA believes 0 per cent balance transfers account for a quarter of all credit card debt while around 3.3m customers are thought be saddled with credit card bills they may never be able to clear.
Announcing a review into the credit card market this year, the watchdog said ‘financial promotions must be clear, fair and not misleading’.
Referring to teaser rates of 0 per cent, the FCA said work was ongoing ‘to look at the issue and consider the case for additional rules or guidance if necessary’.
Rachel Springall, finance expert at moneyfacts.co.uk, said: ‘It’s concerning to think that borrowers may well be relying on balance transfer cards too much.
‘It’s also entirely possible that consumers may be unable to repay their debt before their interest-free deal ends – particularly if they are struggling with their finances due to the rising cost of living.’
Peter Tutton, head of policy at StepChange Debt Charity, said: ‘Lenders need to be very certain that interest free periods do not walk people into unsustainable and persistent credit card debt.’