New Rules For The 0% Card Game

As more and more people enjoy interest-free credit on 0% credit cards, card issuers keep changing the rules. Here's the latest newsflash.

Christmas Day, 2000 was an historic milestone for credit-card users, because it was the day when online bank Egg launched the UK's first-ever 0% balance-transfer deal.

By opening an Egg card and transferring existing credit-card debts to it, new Egg customers could avoid paying any interest (not one single penny) on transferred debts for six months. Naturally, Egg's rivals jumped on the 0% bandwagon, launching similar 0% balance-transfer deals. Later, along came '0% on purchases' deals, some of which were combined with 0% balance transfers to create 'super' 0% cards.

However, a lot has changed over the last 5½ years, and 0% deals are not what they once were. There are up to a hundred different 0% deals available at any one time, ranging in length from five to eighteen months. However, card issuers have been tightening the rules of the 0% game in order to reduce the cost of these loss-leading offers. Here's a round-up of what to expect:

• By December 2005, four in nine credit cards (45%) charged balance-transfer fees on 0% deals. Nowadays, the majority of 0% balance transfers come with fees attached. Most charge a fee of 2% or 2½% of each transfer; a few cap this charge at, say, £50, but the high-profile deals all charge uncapped transfer fees.
  
  
• If you want a 0% balance-transfer deal lasting more than six months, you cannot avoid paying a transfer fee (although Barclaycard does offer a ten-month no-fee 0% deal in its branches, and RBS/NatWest has a limited 0% for nine months offer in branches). Thus, for most attractive 0% offers, transfer fees are now standard.
  
  
• Some lenders are now capping the amount which can be transferred: for example, Barclaycard charges 0% on transfers totalling up to £5,000; any excess over this amount is charged at 6.9% APR.
  
  
• Credit-card issuers are tightening their application criteria and credit scoring in order to weed out 'rate tarts': unprofitable borrowers who surf their debts from one 0% deal to another, costing card firms hundreds of millions of pounds a year.

Naturally, the longer a 0% deal lasts, the more money it costs a lender. Hence, transfer fees are rising, and it could be that uncapped transfer fees of 3% become the norm for 0% deals lasting nine or more months. Indeed, independent financial researcher Moneyfacts (which powers the Fool's search engines for bank accounts, credit cards, mortgages, personal loans and savings accounts) last week revealed the following changes to market-leading 0% deals:

• On 1 July, Virgin Money increased its 0% balance-transfer period from nine months to a year, plus it removed the £50 cap on its transfer fee, making it an uncapped 2% (minimum £3). Also, Virgin shortened its 0% on purchases deal from five months to three months. Although the standard APR for purchases is unchanged at 15.9% APR, the cash rate has risen from 20.9% APR to 24.9% APR.
  
  
• The Halifax/Bank of Scotland One card today increased its 0% on purchases period from three months to nine months, while at the same time reducing its 0% transfer deal from a year to nine months. It also upped its transfer fee from 2% to an uncapped 3%, making it the highest transfer fee in the market. In addition, it reduced its standard APR on purchases from 15.9% APR to 9.9% APR, with the cash rate unchanged at 22.95% APR.

Despite these changes, the Virgin Money card remains a Best Buy for 0% transfers, while the Halifax/Bank of Scotland One card is still a Best Buy for 0% transfers. What's more, the One card is now a table-topper for 0% on purchases, in third place behind the GE Money Transformation card (twelve months) and the Sainsbury's Bank card (ten months).

Clearly, credit-card issuers are determined to make money at all costs, but they can't give up their reliance on using 0% deals as tasty bait to attract new customers. Indeed, one of my industry contacts described these interest-free deals as "the prime acquisition product" for gaining new cardholders, so I think that this game has a long way to go yet!

Finally, if you'd like to become a 0% card sharp, read How To Master Your Credit Cards.

More: Use the Fool to compare credit cards, compare personal loans and compare savings accounts!

Disclosure: Cliff owns shares in HBOS, parent company of Halifax and Bank of Scotland.