0% credit card deals still available - at a price

0% credit card balance transfer deals could soon be a distant memory, if current trends continue - at least deals that don't make a charge for balance transfers could be. This is bad news for "rate tarts", the 5% of cardholders - around 1.3 million people - who, according to a survey by Capital One, are currently looking to transfer a balance.

The latest casualties of the 0% war are the Virgin Money and Marbles cards, which have both now introduced a 2% balance transfer fee, subject to a maximum charge of £50. They join the ranks of Halifax, Barclaycard, Egg, MBNA, Alliance & Leicester, Tesco and Mint, which have all introduced similar fees over the past few months.

For those who don't like to carry credit card debt there is another blow, as perks such as loyalty points and cashback on purchases are also being gradually whittled down or phased out. Sainsbury's Bank is the latest to axe its cashback scheme, joining the growing band of institutions to scrap what effectively amounted to a discount on purchases.

Among others to rein in their cashback offerings are Nationwide, which earlier this year cut the cashback on its Cash Reward card from 1% to 0.5% in the first six months, and from 0.5% to 0.25% thereafter, and has scrapped cashback on overseas purchases altogether. Halifax pulled the plug completely on cashback on its One card, and Alliance & Leicester and Mint have done the same.

Back in 2000 Egg was the first card issuer to offer a 0% balance transfer deal for six months. The marketing ruse was aimed at encouraging people to move their debt to Egg and then continue to spend on the Egg card. However, soon other credit card companies followed suit with 0% offers and, according to Capital One, over the past five years an astonishing 6.8 million people - 15% nationwide - have transferred £14.6 billion between credit and store cards.

Moreover, encouraged by websites such as Moneyextra.com, the small number of canny savers who spotted that the marketing ploy was a loophole for making money turned into an army of tens of thousands of "rate tarts", running up large balances and circulating their debt between the various 0% deals. Many customers had tens or even scores of cards.

In their eagerness to gain market share, some lenders even allowed cardholders to profit from the offers by transferring cash borrowed on the credit card at 0% into a bank account. Borrowers could then move the money on into a high-interest savings account, actually earning money until it was time to pay the balance back to the card company at the end of the deal, or move the debt on to another lender.

Credit card issuers getting wise to consumers

But all this is now changing. Samantha Owens, head of research at data provider Moneyfacts.co.uk, says, "It is now becoming increasingly difficult for customers to find a card which offers them the kind of benefits that were commonplace a year ago. Not only have cashback deals been severely cut, or in a number of cases totally withdrawn, but incentives such as Nectar points and AirMiles are also less widely available.

"With 0% interest deals reportedly costing the card industry in excess of £1 billion per year, and many high street banks reporting a steep increase in bad debts, it's not surprising to see providers taking measures to reduce their costs."

All is not lost, however. Currently, only Intelligent Finance and the Co-op Bank still offer free balance transfer deals with 0% interest, but even if you end up paying a fee you could still be better off switching credit cards, because of the interest saved with the 0% deal compared with the interest paid on a standard rate.

For instance, paying a 2% fee and transferring a £2,000 debt to a card offering 0% for nine months will leave you better off than paying a standard rate of 15% or more. It is also better than taking advantage of Morgan Stanleys special offer of 5.9% for the life of the balance transfer made before January 1st, 2006. Since transfer fees are usually capped at £50 (or £40 for Mint and £35 for Alliance & Leicester) the amount you pay to transfer becomes a proportionally smaller percentage of the loan for larger balances.

The best credit card deal for you?

The secret of getting the best rate from the new card deals would appear to be to look for the longest 0% offer available. At present this is a new offer from Capital One, whose new card charges 0% interest on balance transfers for 15 months until January 1st, 2007 - the longest 0% balance transfer offer in the UK marketplace.

Ken Stannard of Capital One said, "This card will be especially attractive to cardholders looking to reduce their existing debts as cheaply as possible. We recommend that people taking up this offer consolidate their balances and cut up their existing cards to maximise their savings."

The Capital One deal compares favourably in terms of the length of the offer with the 12 months interest-free from Halifax and Bank of Scotland, and nine months from Mint, MBNA and Intelligent Finance. However, watch out for the catch, as Capital Ones 2% transfer fee is, unusually, uncapped, so whether it is the right deal for you will depend on how much you want to transfer.

As for cashback, Morgan Stanley has a special offer for new customers of 2% cashback for the first £2,000 spend if they apply before December 1st, compared with a usual 1% introductory offer. After a spend of £2,000, the Morgan Stanley cashback rate drops to 0.5%. American Express Blue card also has an introductory cashback offer of up to 2% for the first three months after taking it out, depending on level of spend, and then a further 0.5% cashback up to a £2,000 spend in a year, and 1% above £2,000.

If you are looking for other loyalty schemes, although Barclaycard's relationship with Nectar points has now ended, the UK's biggest credit card company will be offering free worldwide travel insurance for all UK customers who book travel through the Barclaycard Travel Service and pay with the card. The deal also includes a 5% discount on holidays from Kuoni, P&O Cruises and British Airways Holidays. Meanwhile, Amex has teamed up with Nectar to launch a Nectar credit card.

So is this really the end of special offers and introductory rates? Kieran Hines of research company Datamonitor has some cheer for the rate tarts, "A glance at the US market has shown that introductory rates can comfortably exist in the most mature of markets, and will therefore remain a key customer acquisition tool for UK issuers."

07 September 2005 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.