Rising living costs mean households are increasingly turning to credit cards to get by. Bank of England data shows borrowing on plastic has reached £68billion – a 10 per cent rise in a year.
Increasingly popular are interest-free credit cards. There are 10million of these in circulation and they come in three types.
Some charge no interest on purchases for a fixed period. Others, called balance transfer cards, allow borrowers to move their debt to a new credit card where they will enjoy zero per cent interest for a fixed period.
Credit card trap: Zero interest deals can be a useful budgeting tool but they have strict rules
A third option is a hybrid card charging zero interest on both transfers and new purchases.
Zero interest deals can be a useful budgeting tool but the cards have strict rules on usage and interest rates rocket at the end of the special offer period, typically to about 19 per cent
Consumers need to have their wits about them to avoid a nasty repayments shock.
Lenders offering the best rates
Competition is rife in both the purchase and balance transfer card market. It means there is a wide choice for those with a top-notch credit history.
The interest-free periods on cards used for purchases have leapt by more than a third over the past year alone, according to new research from rate scrutineer Moneyfacts.
Among the best deals is one from Sainsbury’s Bank giving borrowers 31 months to pay off purchase costs interest-free. Halifax has a deal that lasts 30 months.
Balance transfer deals provide even longer periods of interest-free credit. Sainsbury’s, MBNA – whose card business was recently acquired by Lloyds Banking Group – and nuba, part of MBNA, all offer 42 months.
These are closely followed by the AA, Halifax, Post Office Money and Virgin Money, all at 41 months.
Balance transfers come at a cost
The downside to balance transfer cards is that they come with big transfer fees attached. MBNA, for example, charges 2.79 per cent, so you would pay £139.50 to move a £5,000 debt. Sainsbury’s charges 2.3 per cent – or £115 on a £5,000 balance.
Consumers usually need to transfer any balances in the first three months, or the transfer fee can be even higher.
If you think you can clear your debt quickly, opt for a shorter interest-free offer period with a smaller fee or no fee.
Sainsbury’s offers zero per cent on balance transfers for 28 months with no fee, for example.
Zero per cent does not mean you pay nothing
While no interest accrues on balances, all card issuers require you to make minimum repayments – typically one to two per cent of the sum owed.
MBNA and Virgin require a minimum monthly repayment of £25 or 1 per cent of the balance, whichever is higher, while Halifax asks for 1 per cent.
This equates to £50 a month on a £5,000 balance. The AA’s minimum is 2.5 per cent a month.
With the exception of the AA, borrowers making the minimum monthly repayments will not clear their balance by the end of the interest-free period, and must be accepted for a new card deal to escape interest charges.
BEWARE OF THE PITFALLS
Balance transfer cards can temporarily relieve pressure on those with big debts. Used carefully they can save borrowers money. But they pose risks to those who fall foul of the rules.
Missing repayments: If you default on repayments the interest reverts to the standard rate
If you use a zero per cent balance transfer card to buy something you will be charged at a higher interest rate, typically 18.9 per cent – much to the delight of lenders.
In the past, this rate could be charged not just on the new purchase, but on your total balance. Happily, this is now unlikely.
But if you think you might spend on the card, go for one that offers zero per cent on both transfers and spending, even if the interest-free period is shorter.
Santander has a card offering interest-free balance transfers and purchases for 30 months with a 2.75 per cent transfer fee.
Lloyds, Halifax and MBNA offer hybrid deals for 29 months, with transfer fees of 2.5 per cent and 2.95 per cent for MBNA.
Missing a repayment
If you default on repayments the interest reverts to the standard rate. In many cases you will have to pay a penalty too.
Sainsbury’s Bank’s standard rate is 18.9 per cent a year on its longest interest-free card, for instance.
If it was a genuine mistake you may be able to rectify the problem. But often a default is recorded on your credit file, which could affect your ability to get future credit card deals.
Many borrowers fail to switch to a new interest-free card when their offer expires, boosting lenders’ profits.
The Financial Conduct Authority is concerned about this and will make recommendations for reform of the market by the end of the year.
Rachel Springall at Moneyfacts says borrowers should try to pay back more than the monthly minimum.
I’ve got my debt on a tight leash
In control: Jo Maynard hopes her cards will make her debt-free
Professional dog walker Jo Maynard has had credit card debt all her adult life. But recently she started taking out interest-free cards to get her finances under control.
Jo, 39, who runs the business in Brighton, East Sussex, with her husband Sam, says she likes the flexibility of credit cards over bank overdrafts and personal loans. But she admits they have led to spiralling debts in the past.
She now has her debts spread across three zero per cent cards with MBNA, Halifax and Lloyds. Her plan is to be debt-free within the next few years.
‘Credit was too easy to come by when I was younger,’ says Jo. ‘I got into the bad habit of switching cards but continuing to spend. Now the time has come to cut down my debts. The interest-free cards should help me achieve that but I know I need to be careful and avoid the temptation to spend again.’
THIS IS MONEY’S FIVE OF THE BEST CREDIT CARDS