With Capital One withdrawing their 0% balance transfer deals from the market, site editor Clare Francis is with credit card expert Steve Willey to discuss the future of 0% balance transfer credit cards...
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Clare Francis: Capital One, which has been one of the leading players in the interest-free credit card market, has pulled all of its 0% balance transfer deals.
The UK's credit card market has been highly competitive in recent years, but the financial crisis is having a big impact with lenders turning down an increasing number of applications. That said, those with excellent credit scores have still been able to take advantage of some fantastic deals - Capital One had been offering a card which offered interest-free periods on balance transfers until February 2010. But with these products now having been pulled, what does the future hold?
Steve Willey, who is head of credit cards at moneysupermarket.com, is with me to give his analysis.
Q1: So Steve, this is quite a big move isn't it, by Capital One? Do you think it symbolises the days of the interest-free credit card are numbered?
Steve Willey: I think it's a big, big change for a main provider to pull out from 0% balance transfers. They're still offering purchase offers with 0% so the market isn't completely over for, effectively 'free money', but let's understand that 0% hasn't been purely 0% for sometime now: most balance transfer offers did carry a 3% fee, so in effect you were paying for that offer.
Q2: So when you say fee, that's the transfer fee?
SW: That's the balance transfer fee, yes.
Q3: And that's added to the debt isn't it?
SW: That's right, yes. So, in effect, you're still paying for the 'free money' you're requiring, so these new offers are actually more transparent in many ways because they are, for example, an 8.5% balance transfer offer over 5 years with no fee attached whatsoever: so you are actually only being charged interest on what you are borrowing, in effect.
Q4: Why has Capital One changed its strategy in this way?
SW: Well, we have all seen the effects of the credit crunch, it's affected the mortgage industry, it's affected the loans industry, and now the effects are now being seen across the credit card market. We've seen Capital One pulling out and changing their offers, Barclaycard have pulled a number of their products as well, and its all down to profitability.
For sometime now we have wondered whether 0% on balance transfers can be maintained, and I think the message now is 'not in the foreseeable future or in the way they have been', so there is definitely going to be a reduction in that market place, I believe.
Q5: So you mentioned Capital One offering an 8.5%, how has it changed its strategy, what is it offering instead?
SW: Well what they are doing now is, rather than coming out with a headline product, which is 0% that not everybody qualifies for, they're saying: well this is the offer and if you qualify for it, you will receive it. There is no alternative or counter offer in there, so it's much fairer for you as a consumer when you're applying for the product and actually much more transparent when you are looking at the product that you're choosing to take out.
The great thing about it is that if you are looking for a balance transfer over a period of time, it's almost like a loan in that respect; you have got anything up to four or five years where you can let your balance run down, make sure you make your payments and you're not having to transfer it at 12 or 15 month intervals - which is what the current market is doing today. So again, from Capital One's point of view, they are hoping to retain their customer for longer.
Q6: You mentioned that 'if you qualify, you get that deal'. Are more people likely to qualify for the deals that are available for the longer term with a higher rate than, for example, would have qualified for the 0% on balance transfers until February 2010?
SW: That's difficult to say, I guess every lender has their own lending requirements. From my point of view, the key to it all is still maintaining your repayments and keeping your credit file as clean as possible, and by clean I mean making sure all of your payments are up to date. I would hope that the lenders are not just pricing for risk and pricing for profit. They are beginning to look at this as an overall proposition and say 'well, we will make some money out of this customer over that period of time, therefore we can open our ability to lend to these customers a bit wider'.
Q7: You mentioned that in may ways the 8.5% deal is an alternative to a personal loan really - so it will therefore appeal to people who have got a balance and it's going to take them sometime to pay down - but what other things do you need to bear in mind when you're comparing credit card deals, to find the best deal for you?
SW: Well, ultimately the first thing that's in your mind is 'what do you need it for?' If you are taking a balance transfer card but actually, you're only going to use it for purchases, then make sure it's got some kind of purchase offer against it or even it's the best purchase offer available in the marketplace.
As we mentioned earlier, most of the Capital One products still have a 0% offer against them, there are still some good purchase offers out there as well. If you are looking for a card that's purely for shopping and you are going to pay your balance off in full, then take a reward card - American Express are out there with 5% for the initial three months cashback - so there are still many good offers out there. I think Abbey have just launched a new cashback card as well this week.
Q8: One of the things, though, that is worth bearing in mind for people who do want a card for purchases and balance transfers is that you have to be careful when the purchase offer ends, because you need to look for one that ends at the same time, don't you?
SW: That's right, it's the payment allocation trap. So, if you take a balance transfer product and it runs for, say, 15 months, and you have a purchases offer that only runs for 6, then you will start accruing interest on the purchases that ran for 6 months until you are able to pay your balance off in full.
Most credit card companies will pay the repayments towards their balance transfer or their cheapest debt first, so it takes you longer to get to those other balances.
Q9: So it's really important to look for a card that has got the same length... or have two separate cards?
SW: Or keep them separate, yes.
Q10: Thank you Steve. Just before we go, do you think then the credit card market is likely to remain competitive?
SW: I think there will always be a provider out there, or a couple of providers, who are looking to acquire customers, are looking to change the type of customer they have got and they will come out with different offers at various times. The key to taking advantage of that is making sure you keep an eye on the credit card market and when a product comes along that suits you, then apply for it at the right time.
Clare Francis: Brilliant, thank you Steve.
SW: Thanks very much.
