Credit cards – will the balance transfer market to peak in 2016?

7 Jan, 2016

We’re barely a week into the new year yet the battle for 0% credit card business is already well underway with MBNA throwing down the gauntlet to its rivals with its longest ever 39 month Platinum Card 0% balance transfer offer (with BT fee 2.98%).

This move has been swiftly followed by Halifax upping its 0% balance transfer term to 38 months (with BT fee 2.75%) and Lloyds Bank subsequently pitching in with a 30 month card with just a 1% balance transfer fee.

It’s not surprising to see this level of activity this early as there is plenty of new business to be had.

January is traditionally the busiest month for switching card balances as people look to rejig their borrowing following the Christmas excesses and put into action their New Year resolutions to knock their finances into shape.

The level of balance transfer business in January has grown steadily in recent years, with British Bankers association figures showing 412,000 transactions totalling £0.82 billion in the first month of 2010 rising to 592,000 switches with a combined value of £1.34 billion in 2015.

If the increased card activity seen in late 2015 has continued over the festive period, we could see £1.4 to £1.5 billion pounds of credit card switching taking place this month.

To give you an idea of the scale of plastic related debt in the UK, at the end of November 2015 there was £60.2 billion worth of credit card balances with a staggering £25.5 billion of this sitting on an interest free promotional deal – and theses number don’t take account of the pre and post-Christmas spending splurge.

The push for longer and longer 0% durations shows no signs of letting up with the average 0% term now at 22.5 months – up from 17.3 months at this time in 2013 and 11.9 months in December 2011.

The potential interest savings are huge , but the fact that card companies still seem to be able to make these 0% deals work is no doubt due in part to the number of people who ‘fall off the wagon’ by missing a payment or exceeding their limit and suddenly find themselves paying interest at 18.9% APR or more.

If you’ve got a balance of £2,000 on your card at the market average rate of 18.9% APR you’ll pay around £32 per month in interest charges, on £5,000 it works out at £80 and on £12,000 it will set you back £193 per month.

Switching to a 0% card makes good financial sense as long as you are disciplined. Without the interest charges you have the opportunity to reduce your balance far more quickly, just make sure you don’t fall into the trap of spending on the card again, otherwise you could soon find yourself back at square one – or worse.

The key to getting the cheapest 0% deal is not to focus on the longest deal – unless you need that length of time to clear your card debt. As a rule of thumb, the longer the 0% term, the higher the one off balance transfer fee, so if you think you can repay in 30 months take a look at the new Lloyds Bank balance transfer card where the fee is just 1% of the amount transferred.

If you are happy you can repay within 23 months then Halifax is offering this term without any BT fee, so you really could clear your balance without it costing you a penny.