Interest Free Card Transfer Deals To Be Ditched?

Credit card users who continuously switch cards to benefit from their 0% interest introductory deals are costing the industry billions research reveals. The study, commissioned by Capital One and undertaken by Professor Merlin Stone of the Bristol Business School, found that so-called 'rate tarts' are costing the credit card industry £80 million a month, raising concerns that the deals could soon be on their way out.

Professor Stone said: "Economically, some providers cannot sustain their current offers of 0% interest which means they may have to remove them or start introducing new charges to help reduce their losses."

These standard flat rates could actually prove to be more beneficial to credit card holders than the 0% deals, with Capital One claiming considerable consumer demand for the flat rate deals. According to the provider, 61% of credit card holders would prefer a flat rate of interest rather than having to switch their lenders in order to take advantage of introductory offers.

A number of major credit card providers have already started to charge customers for transferring the balance of one credit card to another including Barclaycard, Mint and Tesco. Professor Stone added: "Research shows that in 2003, none of the cards offering 0% APR interest on balance transfers applied charges for transferring balances compared to around 11% that do today. Card issuers will also increasingly look to find other ways in which to differentiate, the most obvious being the introduction of standard flat rates of interest."

Tesco have introduced a charge of 2% on transfer fees with a minimum of £2 and a maximum of £35. Peter Gerrard of price comparison website moneysupermarket.com said: "Whilst the 0% deals on offer have been great for consumers, the question remains of how far providers can go in offering ever-longer 0% deals. The longer the period, the harder it is to make a profit. The move by Tesco further proves that the days of long 0% balance transfer deals without a fee could be numbered as all providers will be looking at ways to avoid losses accrued from customers that frequently 'churn' their debt from one card to another without using the card for purchases."

He added: "Consumers should keep an eye on more credit card providers charging a fee to transfer their balance for long periods. Unless the long 0% balance transfer period outweighs the fee charged, then consumers are better off sticking to a balance transfer card with no fees."

Capital One claims that the research reveals that in January, 4.2 million people transferred their balances to new cards in order to try and clear them during the introductory 0% interest period, yet only 39% actually managed to do this. Almost half of these people (49%) said they had failed to pay off their debts before the interest rate rose because the introductory offers were not long enough.

Professor Stone said that card providers should offer lower interest rates as standard: "Cards will continue to differentiate through factors such as colour and links to third parties or lifestyles, but the most effective way to stand out in this market is through low interest rates. Given the growing competition in the UK credit card market and the challenging economics of sustaining interest free offers, the next major change to sweep the UK credit card market is therefore likely to be flat rates of interest. Increasingly, growth for card issuers will depend on how low they can go on their standard rates."