Credit card users lured by 0% deals

Credit card users can now pay 0 per cent interest on transferred balances for a record 17 months – as card issuers target consumers with “debt hangovers” from Christmas spending.

Barclaycard’s new interest-free offer on its Platinum card is aimed at consumers looking to shift debts built up on other cards – and experts say it is the longest-ever 0 per cent deal. However – as is now standard with such balance transfer deals – it carries a one-off 2.9 per cent fee (reduced by £20 for transfers over £3,000).

Other card firms that already offer interest-free periods as long as 16 months, including MBNA, are expected to improve their transfer terms in coming weeks.

Santander estimates “leftover” credit card debt from Christmas now stands at £1.1bn and forecasts that 1.5m people will switch their balances to new cards in the first quarter of 2011.

But it is not just heavy borrowers who should consider switching. Card holders who normally pay their monthly bills in full can also find better deals. A number of cards now give both rewards and interest-free credit on purchases – a combination that could be worth hundreds of pounds for some users.

Moneysavingexpert.com, the consumer website, recommends the American Express Platinum card, which pays 5 per cent cashback for the first three months – and then up to 1.25 per cent, depending on spend – as well as offering 0 per cent interest on purchases in the first six months.

Analyst Dan Plant says this could be attractive for someone making a big-ticket purchase – giving up to £100 of cashback (the 5 per cent rebate is limited to the first £2,000 of spending), while allowing them to spread the purchase cost over six months.

Other cards offer less valuable rewards but longer 0 per cent introductory offers. Tesco’s Clubcard credit card, which gives one Tesco Clubcard point per £4 spent on the card, is interest-free on purchases for the first 13 months.

AA’s Reward card combines points worth up to 4 per cent of spend – for members of the AA breakdown service – with interest-free credit on purchases for 10 months. Non-members qualify for rewards at half the member rate.

So, in addition to the spending rewards, customers who make only the minimum repayments during the 0 per cent period can leave their spare cash in a separate savings account to earn interest.

However, Plant warns that cardholders running 0 per cent debts need to remember to pay them off before the interest-free period ends, as rates then soar. Average standard card rates are now about 17 per cent. “You need to be disciplined – this is not free money for ever,” he said.

Among cashback offers, Halifax’s Clarity card looks attractive for holders of the bank’s Reward current account. These Halifax customers already earn a £5 reward every month they put £1,000 in their current account, and can pocket a further £5 if they spend £300 on the credit card (other users do not earn rewards).

Deals like these are being offered in spite of pressures on card issuers’ profits. Overall borrowing on credit cards is continuing to fall as consumers pay down debts, while new rules on repayments mean card users stand to save hundreds of millions of pounds in interest.

As of this month, payments to credit cards must automatically be used to reduce the most expensive debt first, under a change to so-called “payment hierarchy” rules. Previously, consumers who spent on a card after making a balance transfer could be stung with hefty interest costs, as repayments were generally used first to reduce low-rate transferred debt.

Kevin Mountford of Moneysupermarket.com, the comparison service, said: “The new regulations will impact profitability for lenders and were expected to drive out long-term 0 per cent offers from the market, but competition has remained strong and will continue in 2011.”