0% card transfer deals may face extinction

The clock is ticking for credit card users who save money by switching from one 0% APR promotional deal to another, according to a report published today.

The research from Bristol Business School, said that so-called "rate tarts" are costing the credit card industry £80m each month.

The report's author, Professor Merlin Stone, said that some providers could no longer afford offer interest-free deals, and would be forced either to introduce charges for balance transfers or increase interest rates.

"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," he said.

A number of major credit card providers have already begun to charge customers for transferring the balance of one credit card onto another. Barclaycard, Mint, MBNA and now Tesco have all begun to charge customers a fee when they transfer debt from an existing credit card. Tesco will now charge transfer fees of 2%, with a minimum of £2 and a maximum of £35.

Professor Stone said: "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."

Commenting on Tesco's decision to charge for transfers, 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."

Mr Gerrard 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." He urged people planning to make the best of 0% APR deals through balance transfers to move fast, before it becomes standard for card issuers to charge a fee.

Meanwhile, research carried out by card provider Capital One in January revealed that 4.21 million people had transferred credit or store card balances to other cards with the intention of clearing them before the low introductory teaser rate expires, but fewer than two-thirds (61%) managed to pay off their debts before higher rates of interest kicked in. Nearly half (49%) of these people said they had failed to pay off their debts before interest rates rose because the introductory offers had been too short, and 13% said they had simply forgotten when the low rate expired.

Professor Stone said 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," he said.