Balance transfer deals are less good than they used to be.
18 months ago you could have got a 43 month deal. Since then the trend has been down all the way – shorter 0% periods and often higher transfer fees as well.
Now, in early December 2018, there are only 2 deals longer than 30 months – one 33 month deal and one 32 month deal. There is just one
Why are the 0% offers now worse?
There are two likely reasons.
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.
They have responded by making them shorter with higher fees.
The credit limits offered are also probably being reduced. The average size of a balance transfer has fallen in 7 out of the first 8 months in 2018.
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.
For the customer, this highlights that although the 0% offer may sound a bargain, the lender expects to make good money out of it… 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 January 2018 it wrote to banks saying:
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 there was a further letter to banks. The FT reported:
banks with high reliance on so-called “effective interest rate” accounting should consider holding additional capital to mitigate the risks.
Holding more capital would make 0% deals more expensive for banks. If a bank is worried about this, reducing the length and size of its 0% offers will help.
Is now your best chance to refinance credit card debt?
What happens to 0% deals next year may depend on Brexit:
- if things go well, the markets are expecting another interest rate rise in mid 2019;
- if Brexit goes badly, interest rates could be cut to try to help the economy but if there is a run on the pound, the Bank of England may be forced to increase interest rates, possibly significantly.
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.
These are the table-topping deals. If you don’t have any financial problems, these offers are a great way to get the ultimate in cheap credit. If you don’t have a very good credit rating 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.
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.
Be careful about these 5 problems!
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. You may get less than the advertised length
Many adverts say things like up to 27 months, but you could get offered a much shorter time. This is very common. It’s sneaky, but there’s not much you can do about it.
2. 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.
3. Miss a payment date and you 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 are going to make high profits from the people who trip up.
4. You don’t try hard to clear the debt 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.
5. 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.