For more than two years the 0% balance transfer credit cards on offer have been getting slowly less good. And there aren’t so many, so they are also harder to get.
This steady decline has not got a lot worse because of Coronavirus.
You may have been shuffling credit card debt around for years with not much problem, but it is becoming harder.
Banks are offering a lot fewer deals
Two years ago there were 126 balance transfer offers available, according to Moneyfacts.
Since then there has been a steady decline. In 2019 it had fallen to just under a hundred, dropping further to 76 in January 2020.
But with Coronavirus, a lot more deals are being pulled. At the end of May 2020 there were just 56.
So your chance of getting a deal has dropped as there are fewer deals around.
And the deals on offer are much worse
The interest-free period has been falling::
- in May 2017, you could have got a 43 month deal
- in 2018 there were 37 month deals on offer
- for most of 2019 it was about 29 months
- at the end of May 2020, with banks stopping the best deals because of Coronavirus, the longest deal was just 24 months,
At the same time, the fees you pay for these deals have been edging up. Not by a lot – these are still cheap! – but you are still paying more for a shorter 0% period.
The average size of a balance transfer has been falling too. This isn’t because people have lower balances to shuffle around. It’s much more likely to be because the lenders are setting lower limits on the new offer cards.
Why are 0% offers getting 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 interest rate in 2017 and 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
Many credit card lenders use the obscure-sounding Effective Interest Rate (EIR) accounting method that allows them to book as “profits” now some of the revenue they hope to get from you after your 0% period finishes.
The Bank of England thinks this may be risky. In a couple of years you may have moved your balance elsewhere, have repaid it or may be in financial trouble to you can’t pay it…
In 2018 it wrote to banks twice about this, suggesting that banks using EIR may want to hold more capital. Banks don’t want to hold more capital – this cuts their profits. If a bank is worried about this, reducing the length and size of its 0% offers will help.
At the start of the year everyone was worried about the effect of Brexit on jobs in Britain. But now the biggest worries are all about Coronavirus.
The figures suggest the UK is headed for a major recession. Banks are cutting back lending across the board.
Banks made profits from 0% deals, but if a lot of customers will lose their jobs and be unable to repay the money, banks don’t want to take on what now looks like a large risk.
These trends may continue
These offers may not be as great as they were, but if you can get one, they can still save you a lot of money. Check Money Saving Expert for news of the best 0% deals at the moment.
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!
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
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, so then you need to look at the best way to clear those.
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 and there are less of them, 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 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.