Interest-free periods on the rise for credit card holders
Introductory interest-free periods on credit cards for both balance transfers and new purchases are getting longer, research has shown.
With whispers of a double-dip recession becoming increasingly audible, the last thing you would expect from the country’s credit card providers is freer credit.
But on 20 August, for example, Barclaycard announced it was upping the interest-free period on its Platinum card from 15 to 16 months. The 0% interest-free period for new purchases was retained at three months.
Barclaycard’s announcement is part of a wider and growing trend, according to data published this week by comparison website Moneysupermarket.com.
It found that in July this year, consumers making new purchases on their credit card could access 0% interest rates for an average of 12.2 months. This compares to just 10.8 months recorded even at the height of the credit boom in July 2007.
Timeframes over which cardholders can escape paying interest on balances transferred from a different credit card are also stretching. According to the same research, the average interest-free period on balance transfers in July was 15.4 months - nearly three months longer than the 12.8 months recorded in July three years ago.
Encouraging bad habits?
While on the surface the move might appear to be ‘consumer-friendly’, experts have accused credit card providers of encouraging the onset of a fresh reliance on credit.
This threat is heightened by the fact that interest rates, that kick in after 0% periods have expired, are also on the rise. In July, the average APR charged on a credit cards was 17.9%, which compares to 17.2% just two months prior.
A recent poll from campaign group Compass found that seven out of 10 people want the government to impose a cap on credit card interest rates - which are always variable.
Until such a time, Kevin Mountford, head of banking at Moneysupermarket.com, believes that rising interest rates on credit cards "makes it even more important to ensure you pay your balance off before the interest-free period ends".
And unlike the pre-credit crunch days of summer 2007, transferring your balance from one credit card to another will now cost a typical 2.9% of the balance.
As well as Barclaycard Platinum, NatWest Platinum and Yorkshire Bank Gold credit cards also carry market-leading interest-free balance transfer periods of 16 months. The reversion rates are all 16.9% APR, which is also below market-average.
But consumers who do apply for leading credit card deals like these may not necessarily be successful.
James Jones, consumer education manager at credit reference agency Experian said: "Lenders continue to favour applicants with excellent credit histories. As a result, if you want to qualify for the best rates and introductory offers you really need to ensure you make regular payments on time each and every month - as well as keep a check on your credit report."
Applicants who are accepted should be careful to use the perks to their advantage.
Research published last week from the Office for Budget Responsibility, estimated the average British family of four will at borrow at least £24,000 over the next five years.
Office for Budget Responsibility
Formed in May 2010, the OBR makes an independent assessment of the public finances and the economy, the public sector balance sheet and the long-term sustainability of the public finances. The OBR has four man priorities: to produce two forecasts a year for the economy and public finances, to judge the progress the government has made towards meetings its fiscal targets, to assess the long-term sustainability of the public finances and to scrutinise the Treasury’s costing of Budget measures.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
by: Hannah Nemeth
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