Is it goodbye to long 0% balance transfer periods?

Our article investigates whether banks are beginning to rein in interest free lending

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Balance transfer credit cards allow you to pay off existing card debt faster by moving it to a new card with a lower interest rate.

They help to clear debt more quickly because you reduce the amount of interest owed. But you have to pay a fee (calculated as a percentage of the amount involved) to transfer the money from one provider to another.

Interest-free option

Until recently, interest-free terms have been rising steadily, and companies were competing over who could give the longest deals.

This peaked with some balance transfer deals giving terms as long as 43 months at 0%  – meaning you would not pay any interest on the transfer for more than three and half years.

However, in the last few months, borrowers looking for credit cards with lengthy 0% transfer deals will have seen timeframes shortened and fewer card providers offering them.

So does this mean that banks and lenders are beginning to rein in lending?

Household debt

Concern about rising personal debt, now thought to be at around £8,000 per person in the UK excluding outstanding mortgages, has made credit card lenders wary of longer terms.

For example, Halifax has reduced its Balance Transfer card 0% interest term from 37 months to 36 months. The card has a representative rate of 19.9% APR (variable)*.

With lenders such as Barclays, MBNA and HSBC following suit, this indicates that companies are responding to Bank of England worries that terms were becoming excessive.

Lengthy balance transfers came under scrutiny from the Bank of England in August, with particular concerns over the length of the deals, which on average, had doubled since 2013.

The Bank is also worried about the rapid rise in consumer debt, saying in June that this was now the biggest threat to the UK economy. It thinks that households are over-stretched and citing increasing living costs and stagnating wages as fuelling the problem.

Clearly, it is important for all households to stay within their budget, not to borrow more than they can feasibly pay back, to pay the debt back on time each month, and to pay off the balance before the 0% term ends or the interest rate goes up.

Rising interest rates

In addition, the Bank of England announced an increase in its base interest rate on 2 November, from 0.25% to 0.5%.

Although modest in itself, this was a significant decision as it was the first rate increase in a decade.

It means lenders such as credit card providers are facing increased costs, which in turn means they cannot be as generous as they previously were with the deals they offer consumers.

These are the reasons that both big name banks, and smaller lenders alike, are shortening their deals.

They are also aware of the fact that savvy consumers knows that 0% balance transfer cards are good way of managing ongoing debt and move from card to card, rather than remaining beyond the 0% period.

What will happen next?

The combination of the base rate rise and a downbeat Budget in November suggest the economic prospects of the UK are fairly bleak, at least in the short term.

In this context, it is possible the 0% terms on balance transfer cards will fall further.

So if you want to a long-term balance transfer card, now is the time to consider applying.

 

*Representative Example: The Halifax balance transfer card has a 36 month term at 0%, thereafter the interest rate is 19.9% p.a. (variable) – your representative rate will be 19.9% APR (variable).

All cards subject to status and terms and conditions. Available to those aged 18 and over, UK residents only.

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