For two years the 0% balance transfers on offer have been getting slowly less good.
Here is how they have been falling over the past two years:
- back in May 2017, you could have got a 43 month deal
- in May 2018 there were 37 month deals on offer
- in February 2019 the longest offer was 32 months
- in March 2019 that had dropped to 29 months
- in May 2019 29 months is still the longest you can get.
At the same time, the fees you pay for these deals have been edging up. Not by a lot – these are still very cheap deals! – but still you are paying more for a shorter 0% period.
Fewer deals and lower credit limits
Your chance of getting a deal has also fallen as there are fewer deals around.
In February 2017, Moneyfacts counted 126 0% balance transfer offers. That fell to 100 a year later and in February 2019 it was down to 84.
The average size of a balance transfer has been falling too. This isn’t because people have lower balances to shuffle around – it is much more likely to be because they are being offered a new card with a lower limit than they hoped for.
Why are the 0% offers now worse?
1) Interest rates have increased
When the Bank of England’s base rate was ultra-low, it was cheap for a credit card lender to offer these deals. But the two small rises in late 2017 and August 2018 have affected how profitable the 0% offers are for a credit card company.
Banks and credit card companies have responded by offering shorter terms, higher fees and lower credit limits.
2) Bank of England has warned about accounting
The Effective Interest Rate (EIR) accounting method allows a bank to book as “profits” now some of the revenue it hopes to get after 0% periods end.
This shows that although the 0% offer may sound a bargain, the lender expects to make good money out of you… see below for what you need to watch out for.
For the Bank of England, the question is whether some lenders’ optimism about future revenue is encouraging risky lending. In 2018 it wrote to banks twice about this. The first letter in January said:
Assumptions relating to a longer expected life, higher retention rates and additional spend on balance transfer cards may result in higher income and asset valuations, but increase subjectivity and the risk of valuation errors. They also increase interest rate risk.
In June 2018 the Bank of England wrote again. The FT reported:
banks with high reliance on so-called “effective interest rate” accounting should consider holding additional capital to mitigate the risks.
Banks don’t want to have to hold more capital – this cuts their profits. So if a bank is worried about this, reducing the length and size of its 0% offers will help.
And then there is Brexit…
What happens to 0% deals next will depend largely on what happens to interest rates after Brexit. The uncertainty in March may be the main reason the longest deals have disappeared.
Mark Carney, the governor of the Bank of England, said in late 2018:
Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply, and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction.
So interest rates could go up or down. Not very helpful… and several months on things don’t seem any clearer…
It seems likely that the Bank of England would like to raise interest rates at the moment, but is worried about potential adverse effects with a hard Brexit.
So if the things go well, no hard Brexit and no prolonged postponement of withdrawal, there may be at least one small interest rate rise in 2019.
If there is a hard Brexit, the Bank’s insticts may be to try to prop up the economy with an interest rate cut. But in the short term interest rates could rise, possibly sharply, to try to protect the pound, the Bank of England may be forced to increase interest rates, possibly significantly.
Is now your best chance to refinance credit card debt?
So this could be the best opportunity to refinance your credit card debt with a long, cheap deal.
Check Money Saving Expert for news of the best 0% deals at the moment.
The offers featured there are the best “table-topping” deals. With a good rating, these offers are a great way to get the ultimate in cheap credit. Always use a soft checker to see which cards you are likely to be offered. If you just apply and are refused, that application on your credit record will make it a bit harder when you apply to someone else.
If you have money problems you probably won’t get one of them. It’s annoying but if you desperately need to move some credit card balances to 0% you may well not be able to get one.
Beware of these six traps!
In summer 2018, there were more than half a million balance transfers a month. This is big business for the banks and they know on average they will make money from them.
In particular look out for these five catches:
1. Don’t ignore the fees
There are some cheap or free deals that are a few months shorter than the longest ones. You will save money if you can choose one of those and still clear the balance during the term.
2. You may get less than the advertised length
This is very common. Many adverts say things like up to 27 months, but you could get offered a much shorter time. It’s sneaky, but there’s not much you can do about it. If you know your credit score isn’t great or you already have a lot of debt it may be safer to apply for a deal where you will get the maximum term even if it doesn’t look quite as good.
3 You may only be offered a small credit limit
The average size of a balance transfer in August 2018 was only £2,100.
If you are hoping to refinance a large credit card balance you may not be able to. Switching some of your debt to 0% is better than switching none, but it may still leave you with expensive card repayments.
4. Miss a payment date and lose the whole offer
If you miss a payment or make it late, it’s likely the credit card will end your 0% deal and you are back to high-interest rates. And with a problem now showing on your credit record, you can’t easily get a new deal!
This happens to about a quarter of the people that get these balance transfer deals. The lenders know this – they expect to make high profits from the people who trip up, so don’t be one of them!
5. Only paying the minimum as it’s “free”
0% debt is cheap so it may feel like it doesn’t matter, but if you want to get a mortgage it does.
Mortgage lenders don’t like you to have a lot of unsecured debt, even at 0% interest. What may seem like a great way now to organise your money now can backfire later when you have to clear large amounts of debt in a hurry so you can buy a house or remortgage.
6. You can’t refinance when the deal ends
Because the deals are getting less good, it’s dangerous to assume that you will be able to refinance again when a new deal ends.
A significant number of people do not get another deal when one 0% period runs out. This may be because their credit rating has got worse or they have more debt. Or the lenders may just have tightened up their offers.
These 0% balance transfers are a great way to clear debt as all your monthly payments are reducing your balance. But don’t think I don’t need to worry now, it’s free money! but instead really take advantage of them – use the offer as an interest-free loan and aim to repay as much as possible by the end of the 0% period.