We’ve got zero confidence in sneaky ‘0%’ credit card deals

@jane-wallace Are you able to show us the details of the survey yet please?

Ah – the”Peterloo Massacre”, the main outcome of which was the setting up of the Guardian, ISTR. But I’m a little curious about the relevance of events in the early 19th Century to the Ts and Cs of Credit Card balance swaps. Perhaps you could explain further?

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I think the weasel wording used by the financial services industry has a lot to do with the lack of understanding.

‘Credit’ is a ‘loan’, which if not repaid in full becomes a ‘debt’, so a ‘credit’ card is really a ‘debt’ card [a ‘debit’ card being a ‘payment’ card in true language]. But the banks & co call this debt a ‘balance’ because it sounds better. They offer to pay off your debt with the original lender, for which there is a cost because they have to compensate that lender for the loss of future interest, and there is an administrative expense in closing the loan on one side and opening a new loan on the other. It is not surprising that many people do not understand that this is taking place because it is not made clear. So there is a charge for that, which – using old and obscure language – they call a ‘fee’. This fee has to be paid somehow but the new lender can wrap it up in a variety of ways. It can be more, less, or just the same as the actual cost to the new lender. It can be payable immediately, in whole or in part, or spread out by absorbing it in the interest rate on the debt that has been taken over by the new lender or through an extension of the repayment period, or by any combination of these arrangements. It’s not necessarily sneaky, but it’s jolly complicated, and since each competing lender has their own recipe for the deal it’s very difficult to compare one offer with another.

The basic debt still has to be paid back month by month but, depending on the way the transfer has been wrapped up, there may be a period when interest is not charged, or a lower rate is charged, or sometimes the new lender goes without that interest altogether [as part of the price of capturing a new debtor], or they recover the interest over time through the rate of interest charged on the debt and any increases in the debt.

What is often not appreciated is that, once you have a credit card the company can move the interest rate up or down to suit itself and you either have to accept it or pay off the outstanding debt plus any interest due. When you have a low debt level the interest rate will be in the teens%. If you start to borrow more [e.g. by putting more expenditure on the credit card or by repaying a smaller proportion of the debt each month] your interest rate will go up into the twenties%. In other words, as soon as you need a bit of personal quantitative easing they sting you for it. That is a sneaky trick in my view. The banks & co want new customers so they can exploit this feature in the future and they make tempting offers that can easily be misunderstood in order to get them. There is no doubt that switching credit cards can be a useful way of gaining some financial breathing space because , in effect your debt is being rescheduled on, apparently, easier terms. But, all is not what it seems, and the outcome can easily be that you have unwittingly increased your debt and attracted a higher rate of interest into the bargain.

There is a fine line between making loans [credit] easily available to people who need them and allowing people who might not fully understand the consequences, or who cannot understand the terms & conditions, to have easy access to them.

In the absence of any facility to discuss the pros and cons of a transfer with a representative of the credit card company I think it should be mandatory for a clearly set-out worked example [what they used to call an ‘illustration’] to be supplied on paper to the customer before a contract can exist, This can easily be done on-line but it should also be supplied to people who apply by post or by telephone. This should go through the process step by step and show how much is paid and when, what it is for, and how it is worked out.

I agree with Jane that there is no place for terms like ‘0%’ in the marketing of these transfer offers, and that the amount payable to get the transfer should be shown as a cash sum.

Edit: I see Malcolm R has made similar points.