Credit Card News

Interest-free purchase credit cards can be a great way for consumers to spread the cost of a large purchase, yet unfortunately, it seems they now have less time in which to repay the debt, with providers cutting terms across the board – meaning that the average interest-free purchase term has fallen to the lowest level seen in two years.

That's according to the latest quarterly Moneyfacts UK Credit Card Trends Treasury Report, due to be published later this week, which shows that the average interest-free term on purchases has fallen to 335 days, down from 356 a year ago and the lowest seen since March 2017 (316 days).

This marks an ongoing trend with credit card providers, many of whom are reducing the terms offered on their introductory 0% deals. Virgin Money, Santander and Post Office Money, for example, all made cuts to their terms in the last quarter, some by as much as 20 months, which has had a dramatic impact on the overall average. However, it is the slight adjustments to the top cards in the market that pose a greater threat, as other top players could well follow suit in response.

The table below highlights the changing market in more detail. Not only has the average 0% term fallen, but the number of interest-free deals has seen a sharp downturn, too, with this sector of the market becoming increasingly stretched.

Source: Moneyfacts Treasury Reports

"The credit card market is clearly undergoing a spate of reductions across interest-free terms," said Rachel Springall, finance expert at Moneyfacts.co.uk. "The cuts are likely set to continue, but the severity does depend on how long the market-leaders are able to sustain their offers. As we have seen countless times, any significant card withdrawals or reductions can create a domino effect if their counterparts are inundated with applicants.

"Indeed, during a period of economic uncertainty, borrowers may well turn to 0% introductory purchase credit cards not just for high-cost goods, but also as a way to cover any financial emergencies. The fact that the length of the average interest-free period has fallen to a two-year low will therefore be hugely disappointing."

At one time, terms of 30 months and above were commonplace, but those days have come to an end. As it stands, the longest 0% purchase term available stands at 28 months, and even then there are only three cards to choose from, with Post Office Money recently slashing its 28-month deal down to just eight months. This essentially means that consumers have less choice when they're looking to chase down the top deals, and means it's even more important to compare the options available.

"It can be sensible for borrowers to consider one of these cards, particularly as they can get over two years' breathing space on their debts," said Rachel. "If someone made a purchase of £3,000 on a typical credit card and made just £100 in repayments per month, the debt would linger for over three years and cost them £970 in interest*." Yet if they put that same purchase on a 0% card, they wouldn't have to pay any interest whatsoever – as long as they cleared the balance in full before the interest-free period ends – which could make all the difference to household finances.

However, those looking to take advantage of the top deals that are still available may want to be quick, as if the latest trend is anything to go by, they may not be around for long. Rachel concludes: "If consumers are waiting for better deals to surface in this sector they may be waiting some time, as it doesn't appear that any card providers are prepared to offer a deal sitting way above the leaders. To avoid disappointment, customers may want to apply sooner rather than later, before terms get even shorter."

*Credit card repayment based on £3,000 purchase, based on an interest rate of 18.9% APR, minimum fixed repayment of £100 (thereafter a minimum of 1% plus monthly interest or £5, whichever is higher) and would take 3 years and 4 months to pay back, costing £970 in interest over this term.

The interest-free credit card market has seen a definite slowdown in recent months, with reduced competition between providers resulting in 0% terms being cut across the board – which means borrowers now have less time to repay their debts. Unfortunately, our latest data shows that balance transfer card terms have been hit once again, so those looking for a lengthy term to clear their debts may want to act fast!

Ongoing decline

Just last month we reported on the drop in balance transfer terms, but in a matter of weeks, things look even bleaker for borrowers. In February, the longest 0% balance transfer deal stood at 32 months, yet it's now been slashed to just 29 months, and several providers that were once market leaders have been reducing their offers to below that level.

For example, just yesterday Barclaycard reduced the term on its Platinum Balance Transfer Visa from 29 months to 28 months, following the lead of Virgin Money earlier in March. Last week Sainsbury's Bank cut the term on its market-leading Balance Transfer Card Mastercard from 30 months to 29 months, though even this means it still takes the joint-top position in the balance transfer chart.

In fact, the only positive change that we've seen in the market recently comes from Halifax, who increased the interest-free term on its card from 28 months to 29, seeing its newly-named 29 Month Balance Transfer Credit Card Mastercard take pride of place among its peers.

Yet the fact that the longest term available has fallen by three months in a matter of weeks remains telling, highlighting the ongoing decline in the sector. Looking further back reveals an even starker trend – this time a year ago, the top deal available came from MBNA with a 36-month interest-free term, while two years ago both MBNA and Halifax offered the longest-ever term of 43 months, equating to a reduction of 14 months in just two years.

Wider trend

Taking a look at average figures shows that the reductions haven't just been confined to the top of the market, either. Indeed, according to the latest Moneyfacts UK Credit Card Trends Treasury Report, the average 0% balance transfer term has fallen by 30 days in the last three months to stand at 539 days, the shortest term seen since July 2015 and a sharp downturn from the high of 669 seen in February 2017.

Not only that, but the size of the balance transfer market as a whole continues to contract, declining by almost a fifth over the past year: there are now just 80 credit cards offering a balance transfer deal, a drop of 20 from April 2018 and well below the peak of 138 seen in February 2007.

This highlights the continued downturn in the market, and if the more recent activity in the Best Buys is anything to go by, it doesn't look as though the pattern will change anytime soon. This all means that, if you want to take advantage of the best 0% balance transfer deals available, you may want to act sooner rather than later.

There's no telling how long providers will keep their offers on the market, and if you've maxed out a credit card or two, you'll likely want as long as possible to repay the balance. This ensures you'll be able to break your repayments down into affordable monthly instalments, giving you the best possible chance of repaying the full amount before the interest-free period comes to an end. Just make sure your credit score is up to scratch before you apply, then check out the best 0% balance transfer deals to get started.

The cost of moving debts using credit cards is on the rise year-on-year, new research by Moneyfacts.co.uk has revealed.

Credit card borrowers are being hit by a number of factors that are making it more expensive to pay back credit card debts. Research by Moneyfacts.co.uk shows that the average introductory balance transfer fee has increased from 2.03% in February 2018 to 2.31% in February 2019 – an overall increase of 0.28% year-on-year. This, along with the reduction in the top introductory 0% balance transfer deal from 37 months in February 2017 to 32 months today, means that those looking to transfer their credit card debts not only have to pay more in fees to do so, but they also have less time to pay back their debt before interest applies.

As fees are on the rise, consumers will need to think carefully about which card deal is best for them. Consumers who believe they will be able to pay back all, or the majority, of their credit card debt within a shorter time may be better off looking for 0% balance transfer card offering a shorter interest-free deal. While one of the longest 0% balance transfer cards on the market, from HSBC, charges a low fee of 1.40%, on its 32-month interest-free offer, lower fees are available if customers opt for a shorter 0% deal. M&S Bank, for example, offers a 28-month 0% balance transfer deal, and charge a 0.99% balance transfer fee.

Despite rising costs, credit card lending has increased year-on-year. Data from UK Finance shows that credit card lending is up by a £1bn, up from £15bn in December 2017 to £16bn in December 2018, while the amount of outstanding credit card debt has increased from £66bn in December 2017 to £68bn in December 2018. The data also shows that 54% of credit card balances are incurring interest, so while the 0% balance transfer periods have reduced, the majority of borrowers will still benefit by moving their debt to a 0% balance transfer credit card.

Concerned about the high amount of persistent debt, last year the Financial Conduct Authority (FCA) introduced new rules to help tackle the issue and gave providers until September to adhere. This could have resulted in the reduction in the interest-free period on 0% balance transfer credit cards as a way to encourage consumers to pay off their debts quickly.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: "Considering that credit card providers were offering up to 37 months interest-free on balance transfer cards year ago, it's unlikely to be a coincidence that their generosity with these deals has fallen since the FCA stepped in a year ago with new rules to tackle persistent debt.

"It is clear to see why rules were brought in to address the debt issues for consumers who have paid more in interest and charges than they have repaid of their borrowing over an 18-month period. Total credit card debt in the UK hit £72.2bn in December 2018, which translates to £2,634 per household on average, according to The Money Charity.

"As the credit card market adjusts to the FCA's rules, any borrowers who rely on credit cards to make ends meet would be wise to seek out some debt advice before it gets out of control. Card providers have the authority to cease the use of a credit card if the customer does not respond to the proposed changes in increasing their repayment, so this is worth keeping in mind if a borrower is unable to increase their repayment to pay off their debts sooner.

"Not only is the length of 0% balance transfer offers shrinking, but balance transfer fees are rising on average as well, which means the cost to the consumer is higher upfront and they have less time to repay their debts back without incurring interest.

"Any borrower who is looking to consolidate their debts by using a 0% credit card would be wise to set out an appropriate repayment plan and stick to it, but also be wary of upfront fee to transfer debts. The longest 0% balance transfer deals on the market may well be cut down further this year as the market faces economic uncertainties, so borrowers might want to act soon to snap up the lengthiest interest-free offers."

Consumers have less time to pay back the debt they owe on 0% interest rate credit cards than they did 12 months ago.

Research carried out by Moneyfacts.co.uk reveals that the longest deal today on 0% introductory balance transfers currently stands at 32 months, this a drop of five months since this time a year ago when the longest term offered was 37 months.

While the 0% transfer term has fallen, the cost of moving debt remains low as the balance transfer fees to do so remain relatively stable. The Post Office Money Credit Card offers 0% for 32 months with a fee of 2%, so on a £3,000 debt for example, this would cost £60. There are interest-free balance transfer cards available that don't charge a fee, but they have shorter repayment terms – so it's worthwhile for consumers to weigh up all the deals before moving debts.

This fall in 0% transfer term could be influenced by the Financial Conduct Authority recommendation last year that lenders encourage customers to pay back debts faster to help discourage consumers' reliance on debt. And, despite the decrease in the repayment term, the three best deals still give consumers more than two years to pay back their debt at 0% interest, meaning that these cards remain a good way for consumers to manage and pay off credit card debts.

"As with any credit card debt, borrowers would be wise to make every effort to pay more than the minimum repayment if they can afford to do so," said Rachel Springall, finance expert at Moneyfacts. "By fixing a regular monthly payment, customers can get out of debt more quickly, and hopefully pay off their balance before interest applies. If borrowers fail to shift their debt before their interest-free offer has expired, they might have to pay another fee to make another balance transfer elsewhere if they want to avoid interest charges."