Credit card instalment plans:
Affordable alternative to high-interest borrowing

By Michael Lloyd

Making a major purchase on your credit card can work out to be a costly business. If your card charges high interest and you only pay the minimum every month, you could end up paying back more in interest than the item originally cost. However, for many, a credit card is the only way to pay for necessary big-ticket items -- such as a new refrigerator or car repairs -- and slowly chipping away at the balance is the only option. That is, until now.

Thanks to two new offers from Barclaycard and MasterCard, customers will be able to borrow money for a major purchase without interest, instead paying a one-time fee. Barclaycard's Purchase Plan is already available to select existing customers, while MasterCard Instalments is scheduled to be piloted in selected European markets in the second half of 2016.

"We've conducted extensive research around [customer] payment needs, and one of the themes we heard consistently was that they would value the ability to pay in instalments," Heather Cobb, head of core consumer products at MasterCard Europe, said in an emailed response to questions. "So we have created instalments in response."installment-plan

How credit card instalment plans work
While details on MasterCard's scheme are not yet clear and will likely vary between card issuers that choose to offer the scheme, the Barclaycard plan is only open to select existing customers. If you qualify, you can use the plan to make a purchase costing more than £495. Instead of paying your credit card's standard variable rate, you'll pay a one-time fee of up to 8% of the value of the purchase and no interest. The fee depends on the amount you borrow and the length of your repayment period. You have up to 24 months to repay.

"Purchase Plan is available across our core product range, to customers whose account passes eligibility criteria (such as good payment behaviour, good credit history, sufficient available credit, etc.)," a Barclaycard spokeswoman said in an emailed response to questions. You can check your eligibility via your online account, the spokeswoman said.

"Once the purchase appears on their account (24-48 hours after being made), they can create a Purchase Plan with it by simply logging into their account, going to the ‘Transfers and Offers' section, selecting the purchase and choosing their desired repayment period and fee," the spokeswoman said.

If you miss two consecutive payments on the Barclaycard plan or struggle to meet your agreed instalments, your agreement will be cancelled. You'll be charged the standard variable interest rate on the remaining balance until you clear it. You'll get a portion of your original fee back, based on how many payments you've already made.

Will a credit card instalment plan save you money?
When Barclaycard piloted Purchase Plan in 2015, the Daily Mail's This is Money website reported that critics had branded the concept overly-confusing and "essentially one credit agreement within another".

While it may not be the most straightforward of financial products on the market, it can save you money if your only other option is borrowing at Barclaycard's standard variable rate and paying off the purchase over months or even years. The same will be true of MasterCard's scheme if it operates in a similar fashion.

For example, if you used Barclaycard's Purchase Plan to borrow £1,000 at 6% over 12 months for a new laptop, you'd end up repaying £88.33 per month, for a final total of £1,060. Borrow the same amount on a credit card charging 18.9% APR, and you'd pay back around £92 a month for 12 months, and pay about £100 in interest. The more you borrow, the more you can potentially save.

However, if you qualify for a low interest personal loan or a 0% purchase interest credit card, both would work out cheaper than the instalment plan.

See related: Can you benefit from a 'double-duty' 0% credit card?, With long 0% balance transfer deals, one strike, you're out

Published: 26 February 2016