How do banks benefit from long balance transfer offers?

By Benjamin Salisbury

You've likely heard about the "balance transfer war" going on between banks. The longest 0% deals on the market have reached 40 months, and many offer three years or more. The lengthy deals have inspired millions of balance transfers in the last few years. Giles Mason, senior press officer for the UK Cards Association, says there were 6 million transfers in 2014, worth just over £13.1 billion. The average transfer is approximately £2,200. But what's in it for the banks?

Back in the 1990's, when these products were introduced, the normal interest-free term was around six months. Providers hoped customers would stay after that term ended, but if they left, the card company would not lose too much money.

With the longer deals, though, this no longer holds true. Banks and credit card companies lose money from taking on a balance transfer debt because they pay interest on the money that was lent to the cardholder. However, issuers rely on a number of other factors to make money, Andrew Hagger, founder and director of MoneyComms, said in an emailed response to questions.extended-balance-transfer-offers

1. Staying ahead of the competition
The simplest answer: to stay at the top of the competition.

"I think [one] incentive is simply to remain competitive in the best-buy
tables and hopefully pick up new customers who deliver profitable outcomes," Hagger said.

2. Transfer fee
Companies get some funds back through a balance transfer fee, which applies to the entire balance you're transferring. This fee can be less than a month's worth of interest, and, since it is added to the credit card balance and does not come directly out of your pocket, it feels like a relatively pain-free charge.

However, depending on how much money you're transferring, it can add nearly £100 to your balance. For instance, if you transfer a balance of £3,000 and the balance transfer fee is 2.95%, you'll pay £88.50.

3. Customers that exceed, negate the 0% deal
The card company may hope that you use the card to make purchases without paying them off, so that you pay (often high) interest on them. More so, however, they are counting on some customers exceeding or negating the 0% deal.

First, if you don't repay the balance by the expiry of the 0% deal and don't switch the balance to a new card, you'll end up paying the standard interest on your remaining balance, said Hagger.

"Before the introductory rate ends, we clearly state any changes in price in the customer's statement, so they are always free to leave when their low rate deal ends, with no barriers to exit," Carol Thompson, a consumer finance spokeswoman for Halifax, said in an emailed response to questions. "We provide clear and transparent information to help customers understand the terms and duration of the introductory rate."

Banks also benefit if you miss a payment, exceed your credit limit or negate the balance transfer deal in any way. In that case, Hagger said, the 0% deal is terminated immediately and your balance begins accruing interest. This may be banks' biggest benefit from extending 0% balance transfer offers.

A report published in January 2016 from the Co-operative Bank found 25% of the 15.6 million Brits who have taken advantage of a 0% balance transfer credit card in the last five years have fallen foul of the terms of the offer, and had the promotional 0% rate withdrawn. As a result, UK cardholders have paid up to £1.2 billion annually in interest.

Additionally, making a late payment or exceeding your credit limit both come with their own, separate fees. Typically, it's about £12 for either. Either slip-up could affect your credit score as well, making it difficult for you to get a different credit card -- meaning you're stuck with your now high-interest card.

4. Opportunity to offer you more products
Even if you benefit from the 0% deal in its entirety, the card company has the opportunity to sell you new products when the deal ends. These products could still be beneficial to you, but they still allow the company to make money.

"We always aim to offer attractive products that are valued by our customers and that deliver a fair return to the company," said a spokesperson from Virgin Money.

"Attractive offers for new customers are a feature of the extremely competitive nature of this market," said Halifax' Thompson.

Be smart with 0% balance transfer offers
It is important to remember that a credit card company only has to offer its top promotions to 51% of cardholders. This means almost half of applicants won't get the headline rate, but could be offered a less competitive rate or not accepted at all.

"All the different costs associated with a balance transfer will be set out in the summary box for each individual card," says Mason, of the UK Cards Association. It's vital to read all the terms and conditions before you apply, and again when you receive your card so you can maintain your offer without any nasty surprises.

See related: 5 ways to avoid pitfalls of credit card money transfers, Can you benefit from a 'double-duty' 0% credit card?

Published: 4 February 2016