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Are interest-free credit cards a solution for spiralling debt problem?

Published: 08/01/2017 by Comments

Are interest-free credit cards a solution for spiralling debt problem?

As January progresses many Scottish residents will be feeling the effects of spending over the Christmas period.  Debt charities expect this month to be busier than ever as people look at ways to resolve festive debt.

In the meantime a selection of new interest free credit cards with zero per cent balance transfer costs have been launched in the UK, giving borrowers breathing space to repay debts without being charged.

It remains a reality though that as many as two thirds of consumers will not manage to pay off all debt before the timeframe, after which interest rates as a high as 21 per cent will be activated.

Deals currently on the market include MBNA, who offer the longest interest free period at 43 months with £20 cashback offered for transfers totalling £1000 by day 60 of the interest free period. The card charges a 3.29 per cent balance transfer fee.  Other offerings include 42 month interest free with Sainsbury’s, Barclaycard and nuba.

The Bankers Association have reported that in 2010 £820 million worth of debt was transferred to interest free cards, rising to £1.36 billion in January 2015 – with numbers of users rising from 412,000 to 558,000 respectively.

It appears that household debt has spiralled back to amounts similar to the 2008 credit crunch, with Bank of England figures released this week showing a UK personal debt increase of 10.8 per cent – taking the total debt figure to £192.2 billion by 30th November 2016. 

Founders of Moneycomms believes that figures could result in lenders being stricter with borrowers, “with the total amount outstanding on credit cards up by £2.5bn in the last 12 months, and now at £63.1bn, you start to wonder how much longer this credit spree will last before lenders put the brakes on.”
Head of Policy with debt charity StepChange, Peter Tutton, believes that the situation should be a real cause for concern, “previous experience shows how such increases in the levels of borrowing can leave households over-indebted and vulnerable to sudden changes in circumstances and drops in income that can pitch them into hardship.”

The new figures arrive as new a form of peer-to-peer (P2P) lender The Money Platform enters the market after been approved by the Financial Conduct Authority – a measure offering better value to consumers than payday lenders.  The Money Platform website saves money by directly connecting borrower and lender – working primarily with lenders offering loans up to £1000 for periods of three to 12 weeks.

The platform has processed 1255 applications, of which 82 loans have been given the go ahead.  It is worth noting however that The Money Platform’s lending accumulates APR of 165 per cent, which means in reality that borrowings of £1000 over four weeks will cost the borrower £1112 in total. With this in mind overdraft and credit card options may be a preference for consumers.

Chief Executive of the Glasgow based Debt Support Trust, Stuart Carmichael, believes that Halifax, Bank of Scotland, NatWest and Royal Bank of Scotland all have overdraft facilities enabling short term borrowing for 30 days.  The cost of borrowing £1000, calculated at an APR of 19.89 per cent and including a £6 monthly fee would be £21.02 – a good option for those looking for short term debt assistance.

Interest free credit cards are another good short term debt solution according to Carmichael, “if it’s a short-term loan that’s required, an interest free credit card for one month would be the best option - borrow the £1,000, repay it after four weeks and pay no interest” he said.

However, in spite of this, Charles Balcombe, co-founder of The Money Platform, believes that some borrowers still prefer a fixed term loan, “we believe that we are one of the most cost-effective, short-term loan options available in the UK,” he said. “Whilst credit cards can be cheaper, our research has found that many people prefer the ability to borrow a sum and repay it in full as quickly as possible, instead of constantly having credit card debt looming over them every month.”

Mr Carmichael was in agreement stating that people must know they have the capability to repay the borrowed amount.

Photo credit: Sean MacEntee

Colette Lamb
News article by:
Colette Lamb

A business sector writer with over 15 years of experience working in the marketing, commerce and law sectors' internationally and in the UK. Interests include composing music and other creative communications such as art and dance therapy.

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