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Are good savers subsidising credit card borrowers?

0% written on blackboard

If you’ve got existing debt on your credit card, this week has brought some great news – a war has broken out between card providers keen to attract new customers with 0% balance transfer deals.

Not long after Nationwide increased its 0% balance transfer deal to 17 months, MBNA and Virgin responded by putting their own 0% period up to 18 months.

And now Barclaycard has joined in, trumping them all with a 20-month interest-free deal, albeit with a higher transfer fee of 3.2%.

But it’s not good news for everyone. You can bet your bottom dollar that it’s not the banks and credit card companies that will foot the bill. It’s the rest of us.

What’s the catch?

The Bank of England base rate has been at 0.5% for two years now, and Libor (the rate at which banks lend to each other) is still well below 1%. Yet, standard credit card interest rates remain stubbornly high at around 17 to 18%. And that’s only the advertised rate for new customers – no-one tracks the rate being paid by existing customers, many of whom have seen major hikes in the rates they pay.

New EU rules also mean that only 51% of successful applicants for a new card have to be offered the advertised annual percentage rate (APR). The remaining 49% could be offered an inflated rate.

Plus, let’s not even mention the savers who are cross-subsidising borrowers (and boosting bank profits) thanks to the shockingly low rates on offer to them.

Most will be left out

Finally, if you haven’t got a near-perfect credit score, chances are you won’t get the deal anyway. This is ironic, since many of us with existing debt probably haven’t got an impeccable track record either.

Credit card companies can therefore cream off the customers they think will be most profitable in the future, leaving those whose finances would really benefit from a cut in interest out in the financial cold.

If you’re a long-term borrower with a good credit score, you’re not going to complain – the new price war is a heaven-sent opportunity to save money and you’d be mad to miss it. If you’re a prudent saver, or if you have a less than perfect credit history, you probably don’t share this enthusiasm.

Do you think banks should be rewarding people who borrow at the expense of prudent savers? And should we thank them for helping some of us repay our debts earlier and more cheaply?

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