Borrowing up, interest down -- but for how long?

By Marianne Curphey

Borrowing is up (and interest is down) in the UK, thanks, in part, to the recent "balance transfer war," and the country's changing demographic. But while this seems like a positive trend, it may be too good to be true.

Interest deals might be good for a while, but as soon as 0% balance transfer periods are over, many Brits find themselves facing a wall of steep interest on their charges. In fact, that trap may be the eventual undoing of the 0% promotion. One major banking player has stopped offering such deals, a move that may signal the beginning of a cooling off period for the BT war. borrowing-high-interest-low

Growing credit appetite
According to a study by banking industry group BBA, credit card borrowing is growing at a rate not seen since 2009. Thanks to 0% interest periods, nearly 40% of that borrowing is accumulating no interest.

Paul Crayston, spokesman for National Debtline, says there is a mix of other reasons as to why borrowing on credit cards is growing.

Appetite for lending from providers might be increasing, he says, fuelled by the growing economy. And greater optimism around the economy might be encouraging more people to borrow. Finally, the squeeze in the cost of living for lower income households might be forcing some families to bridge the gaps in their budget with credit.

The country's changing demographic affects credit card use as well. According to the insurer Liverpool Victoria, pensioners are using credit cards more frequently. Retirees are taking out credit cards to cover overspending as the realities of living on a pension take hold, and some are still paying off mortgages.
 
Long 0% interest deals taking their leave

The BBA study coincides with an announcement from two of the biggest card providers on the market -- RBS and NatWest -- that they will no longer be offering interest-free credit cards. According to the banks, their research shows that two-thirds of the market doesn't switch cards before the 0% deal expires and interest rates begin to apply.

RBS said in a statement that the average holder of a 0% balance transfer card has around £9000 in debt across multiple cards, and does not pay down that debt over a 0% period; in fact, over time, they increase it.

Moray McDonald, Interim Head of Products and Marketing for RBS, said 36% of people who keep their balance on the 0% card for 7 to 12 months after the deal has expired, have an average balance of £2,403 and pay about £360 in interest because the interest rate rises at the end of the term.

"The credit cards industry is absolutely dominated by teaser rates, trapping people into a spiral of debt that they never pay down; it's not good for our customers, and it will play no future part in this bank," said McDonald in a statement accompanying the official announcement.

"Removing these teaser rate debt traps and launching a new transparent, low-rate credit card will be a big step towards earning back our customers' trust."

Should you take advantage or be glad you didn't jump on the bandwagon?
David Black, of Consumer Intelligence, says that currently, only RBS and NatWest have plans to scrap 0% interest deals, but there might be fewer deals around next year because of  potential changes to the fees paid to card providers by merchants and retailers, which may squeeze profits.

In the interim, NatWest and RBS might lose some new business as a result.

"Zero percent deals do drive new business for banks, although a lot of new business is churning from other providers," Black says.

He says consumers should take advantage before such deals are gone.

"There is no purchase fee and, typically, a balance transfer fee of 3%, [which is] a very low borrowing rate," Black says.

But if you do jump on the trend, do so with caution.

"Lending must remain responsible and affordable," says a spokesperson for Septchange, a debt counselling charity. It's essential that lessons of the previous credit boom are not forgotten, he says. 

"Zero percent offers require a certain amount of proactive money management," agrees National Debtline's Crayston. "The main thing to do is to have a clear and sustainable plan in place to repay all of the debt before the end of the interest-free period -- if you're not confident you can do that, do not take the risk. Do not assume there will be another 0% deal to roll onto at the end of your current deal."

See related: How to take advantage of the balance transfer war, Many applicants denied best balance transfer deals

Published: 8 April 2014