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."
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.