Plastic needn't cost an arm and a leg if you shop around for the most competitive rate, finds Emma Lunn
SCOTS are leaning on their credit cards harder than ever to get them through the credit crunch, according to the Bank of England, which calculates that spending on plastic has risen by an average of £179m each quarter over the past year with the aver
age debt standing at £1,384.
The good news is that there are still some competitive credit card deals around, both for people wanting to transfer existing balances and those wishing to spend on their cards. However, the bad news is that the credit crunch means that only applicants with perfect credit histories are being accepted.
According to financial comparison site Moneyfacts, credit card users with an existing balance will find that the longest balance transfer deals have increased in length over the past couple of years. Balance transfers are when you switch a debt from one card to another with a cheaper interest rate. Although there is usually a fee for doing this, the savings on interest payments tend to make it worthwhile, but you need to do the sums carefully.
Some cards offer a 0% introductory offer on balance transfers for a set period of time. If you pay off the debt within this time period, you won't pay any interest at all.
Michelle Slade, analyst at Moneyfacts, says customers are in luck as the longest 0% deals for terms of 12 months or more have increased by 11.4% since August last year.
"This is great news for consumers as they can have longer to reduce their debt and as a result less marks on their credit file as they won't need to switch as frequently," she says, "Balance transfer deals are a fantastic way to reduce outgoings as well as reducing the overall interest paid and cutting the time it takes to repay the debt."
However, if you have had credit problems in the past or don't meet all the lender's criteria, getting accepted for a decent balance transfer card may be tricky.
Slade says: "Although there are longer deals on the market, it is not known what percentage of customers is accepted for these deals. Also, with the majority of cards offering typical rates, of those that are accepted, customers may find they are paying a higher rate of interest once any deal ends."
The best balance transfer cards available at the moment include Barclaycard's OnePulse, which allows new customers to shift debts at 0% until December 1, 2009, for a 2.5% fee. The main drawback is that it's only for people that don't already have a Barclaycard. You also need to be over 23 and earn more than £15,000 to apply.
If you're not eligible, another good deal is HSBC which offers 0% on balance transfers for 13 months with a 2.5% balance transfer fee. Virgin Money offers 15 months interest-free and Egg 0% until December 2009, but these cards come with balance transfer fees of 2.98% and 3% respectively, so you will need to do your sums to work out whether it's worth paying the fee to get the 0% deal.
There are still a couple of cards around that offer fee-free balance transfers although the 0% period tends to be shorter. The Abbey Zero and Ulster Bank gold card both give six months at 0% with no fee.
If you plan to spend on your credit card there are a number of cards that offer 0% interest on new purchases for a certain amount of time. Some also offer 0% on balance transfers meaning they are a good option if you have existing debt but also want to carry on spending.
The Halifax All-In-One Mastercard offers 0% on both purchases and balance transfers for 10 months, while the Marks & Spencer Money Mastercard offers 0% on purchases for 10 months and balance transfers for six months, after which it reverts to an APR of 15.9%.
Brendan Cook, M&S Money chief executive, says: "This new card means that M&S are now one of the few providers in the market to be offering excellent 0% deals on both purchases and balance transfers. This card not only has a competitive APR but also benefits from the M&S Loyalty Scheme, making it one of the most attractive credit cards in the market."
Other cards, such as Lloyds TSB Advance Mastercard and the PayPal Mastercard, offer six months interest-free for purchases.
Whichever credit card you have there will be a minimum repayment you have to make each month, normally expressed as a percentage of the outstanding debt. However, just paying the minimum each month is a dangerous tactic as it will take years to pay off the original debt.
The Banking Code states that minimum repayments should cover at least the interest charged each month, but by not exceeding the monthly interest incurred, consumers are repaying very little towards the outstanding balance.
Experts say some providers are reducing the minimum payment required on their cards which encourages consumers to spread the debt over a longer time period – something which may be tempting during the credit crunch – and so pay more interest which in turn inflates lenders' profits.
For example, on a £5,000 debt with an interest rate of 15.9% APR, repaying the minimum 2% each month will mean you end up paying £7,548 in interest over 43 years until the debt is paid off.
Simeon Linstead, head of personal finance at uSwitch.com, says minimum repayment levels are more of a problem now than ever before. "With the cost of living on the up and people being forced to tighten their purse strings, consumers will be more tempted to just make the minimum repayment on their credit cards and spend the cash on more pressing bills," he says. "However, this type of repayment barely touches the balance and in the majority of cases just covers the interest incurred.
"Sending a small monthly payment to the credit card company may seem like a good idea at the time. However, this is an expensive lesson in the long run. We urge the credit card industry to set all minimum repayments at 3%, we have long been calling for this, and it is long overdue."
The full article contains 1072 words and appears in Scotland On Sunday newspaper.
