Interest free terms on credit cards have been steadily rising since they were first introduced in 2000. In those days borrowers did not have to pay interest on their balances for the first six months.
Borrowers can now get a bumper 43 months at 0 per cent interest using a balance transfer credit card or a slightly shorter 31 months using a specialist purchase deal – the longest deals ever offered.
The level of household debt is rising by more than 10.3 per cent a year, and there are fears these cards are heaping fuel on the fire. Do they show any signs of slowing down?
Time bomb: Fears have been rising that a boom in 0 per cent deals could throw borrowers into hot water in the future
The Bank of England base rate sat at 0.5 per cent for seven years until it hit a new all-time-low of 0.25 per cent after the Brexit vote.
Personal loan rates are at record lows of 2.8 per cent, mortgage rates have never been lower than today and credit cards and 0 per cent interest deals are swelling.
The conditions mean borrowing is booming and the cost of servicing these debts is relatively cheap – and the fear is that this is encouraging many households to go out and spend money they don’t have simply because they can.
Balance transfer providers have added 19 months to 0% deals in 5 years
Balance transfer deals offered just 6 months when they first appeared – borrowers can now hold off from clocking up interest for seven times longer.
Over the past few years terms on balance transfer deals have grown steadily by around two or three months, and in the past five years the length of the top deals has jumped by 19 months.
The biggest jump in length came in 2013, adding 6 months to the available 0 per cent interest term on balance transfers, but the effective cost of shifting your debts to one of these cards actually went up as banks loaded their balance transfer fees at the same time.
This is a common tactic used by lenders. Often you will see transfer fees rise slightly each time a provider extends its 0 per cent term.
As more follow, they begin to compete to stay at the top of the tables by inching their fees down below rivals.
It’s worth remember if you are in the market for a new card, holding out for a few weeks after a new term appears or opting for one slightly lower down the table will sometimes get you a smaller transfer fee, making it cheaper overall.
A difference between a £5,000 transfer at 3.5 per cent and 2.5 per cent is £50.
Charlotte Nelson, finance expert at moneyfacts.co.uk, says: ‘The competition among providers has been fierce, with many trying to leapfrog each other to earn not only the top spot in the Best Buys, but also to be seen as offering the longest deal on the market.
‘This battle was primarily focused on the balance transfer market, but as that market has started to become saturated with great offers, providers’ attention has moved on to new areas, including introductory purchase offers.’
Money transfer deals tend to be slightly rarer, with only a handful of lenders making them their focus, including Virgin Money, Tesco Bank, MBNA.
The tend to come with slightly higher transfer fees, but since 2012 the available deals have risen to 41 months from 20.
Credit cards: Defaqto research shows how quickly 0% balance transfer deals have climbed
Promotional deals on purchases have doubled since 2012
The first ever purchase credit card was launched in 2000 by Capital One, offering just six months 0 per cent interest. Fast forward to 2017 and length of these promotions has gone up by more than five times.
The numbers of cards available offering the deals has also gone up dramatically.
In 2003, 21 per cent of the credit cards on the market, a total of 21 deals, offered 0 per cent purchase periods. Now as many as 103 (44 per cent) come with one.
These are the deals dominating headlines (see below). Purchase cards are incredibly useful for spreading the cost of large purchases, and miles cheaper than a small personal loan.
But it can be tempting to add to your debt with everyday spending or to make ends meet, therefore decreasing your likelihood of paying it back before interest kicks in and putting them in a dangerous situation if the situation ever changed.
Interest-free terms have grown less quickly on purchase credit cards according to Defaqto data
So what’s on the cards for the future?
The longer these deals go on for, obviously the longer borrowers have to clear their debts in time which means the card company might lose out on charging you interest.
That said, for some this might actually encourage them to build up a larger balance on their card.
Many experts predicted that balance transfer and purchase credit card promotions have been nearing their limit, with card providers extending their periods less quickly in recent years.
CREDIT CARD REALITY CHECK
The average credit card debt today is £2,184 according to comparison site, Money Supermarket.
At an APR of 18.5 per cent you would need to repay £108 per month to clear it within two years handing over £419 in interest.
If you used a 0 per cent interest card paying the same £108 per month you would clear the balance in 21 months without paying interest.
FCA figures however suggest that 1.6 million credit card customers only pay off the minimum amount each month.
Those doing this would take 25 years to clear the same debt, costing more than their initial balance in interest at £2,986.
You can use our calculator here to find out how much you would add to your debt by falling into the minimum repayment trap.
Brian Brown, head of insight for banking and general insurance at Defaqto, says: ‘It seems that 43 months or thereabout is the current ceiling.
‘It’s hard to see how card providers can make a lot of money when lending at 0 per cent over 3 years with a fee that equates to less than 0.75 per cent a year. The only ways I can see this working is if the customer fails to clear the balance at the end of the period (and doesn’t transfer to another lender) or the customer also uses the 0 per cent balance transfer card for purchases (so the lender will make something out of the merchant fees in the transaction).
Charlotte Nelson, finance expert at moneyfacts.co.uk, says it is difficult to say whether the market has reached its peak.
She says: ‘Everyone thought the balance transfer market would reach a maximum length they have climbed higher and higher. It is possible that providers set themselves a level they won’t exceed but with competition high other providers could quickly exceed this.’
The second factor to consider is the wider economy.
Historically changes in the base rate have never directly affected credit card APRs, however an environment rife with cheap credit has contributed to the lengthening of zero interest deals.
Nelson says other broader economic factors however could see 0 per cent deals go the other way.
She says: ‘It is possible economic factors outside card companies and borrowers control impact the credit card market. So if the economy was to contract and unemployment go up it is likely these deals will shorten.’
Are they storing up trouble?
Credit card debt levels sit at £67.6 billion according to Bank of England data and as many as 3.3 million people estimated to be struggling with persistent debt, according to the Financial Conduct Authority.
Recent figures from the TUC suggest that the average household will have unsecured debts worth £13,900 this year.
The fear is that with so much debt sitting on the nation’s credit cards, even a small change could upend their finances.
The combination of increasingly tempting 0 per cent deals, booming debt levels and a squeeze on incomes thanks to rising inflation (currently 2.9 per cent, the highest since 2013) and slow wage growth is ringing alarm bells among experts.
Jane Clack, debt consultant at Payplan explains: ‘Record low interest rates have led to people spending cheap or free money to massive levels. But those people could now be sitting on a credit card time bomb.
Ever more 0 per cent interest deals, coupled with savvy consumers swapping and switching at the end of promotional periods, have resulted in debt-juggling becoming a way of life.
Borrowing boom: BoE figures show credit card borrowing is up 10.3 per cent
Rising inflation, a slowing economy and weak wage growth mean that many people aren’t bringing balances down, or paying them off – and any sudden change in circumstances could put them into financial hardship. If interest rates were to jump, and 0 per cent deals dried up, many people could be left struggling to pay the minimum payment each month.’
Household debts have been rising dramatically compared to household incomes over recent years according to the Bank of England’s Financial Stability Report.
The Bank also raised concerns that said affordability checks for credit cards and loans were not strict enough.
The situation could make it even harder for borrowers struggling with persistent debts to afford to clear them.
Both the FCA and Prudential Regulatory Authority have flagged concerns, particularly over those borrowers who end up paying more in interest and charges than their actual borrowing.
They are due to publish their expectations of lenders clear in July.
Mike O’Connor, Chief Executive of StepChange Debt Charity, says: ‘There are 3.3 million people already in persistent credit card debt. With the nation’s credit card bill growing rapidly, we can expect many more people to find themselves struggling in the future.
‘Credit cards are designed to be a short-term product, but for many people they have become an expensive, long-term form of borrowing.
‘As lending continues to grow strongly two things must be addressed. What can be done to help borrowers who fall into persistent credit card debt? And, critically, what are the product features of credit cards that need to change to stop them trapping so many people in unaffordable, long-term and persistent debt? It is not clear that the Financial Conduct Authority’s current proposals sufficiently answer these questions’.
So should you steer clear of interest-free deals altogether?
According to the FCA 60 per cent of UK households have a credit card.
The most sensible way to use a credit card is to clear you balance each month to avoid interest altogether.
Disciplined borrowers are can also use the tempting 0 per cent promotions to help spread the cost of clearing either existing debts or the cost of their purchases.
They mean that money you do pay to your credit card provider goes to wiping out your debt rather than covering interest.
Two or three years seems like a safe bet for most to be able to clear any balance on your card, but the reality is if you use the card for everyday spending, or you only pay off a minimal amount each month, it is easy to end up with debt still left on your card.
Whether it’s a balance transfer or purchase card, any balance left on the card gets hit with standard interest, usually around 18.9 per cent.
Leaving a £3,000 balance on your card will cost you an eye-watering £47.25 in interest in just a month.
Credit Card Reality Check Calculator
Warning: This calculator does not factor in the time it would take to repay a credit card debt where the minimum payment is calculated as a percentage.