Hands Off Our 0% Cards!
A senior Conservative MP has criticised 0% credit cards for getting people into debt. We explain why he's mistaken.
In an interview a week ago with the Financial Times, shadow business secretary Alan Duncan hauled banks over the coals. The senior Conservative MP rebuked credit-card issuers for using 0% credit cards to `seduce' people into taking on debts that they would not otherwise be able to repay.
Clutching a 0% credit-card mailshot sent to him by Barclaycard, Mr Duncan argued that lenders must "look at and appreciate...the individual human misery that will ensue on the back of this practice...This is not acceptable practice. This is corporate irresponsibility."
Alas, although I agree with Mr Duncan's concerns about debt, I am convinced that he is sadly mistaken about credit cards. Indeed, I would argue that he has firmly grasped the wrong end of the stick! For the record, we Fools are big fans of interest-free balance transfers and 0% on purchases deals. In fact, we view them as one of the most effective tools in the battle against debt.
How 0% balance transfers can save you a fortune
For example, let's say that you owe £5,000 on a typical credit card. On average, you'll be paying interest on this debt at around 16.5% APR. Now let's assume that you repay this balance via a standing order or Direct Debit of £200 a month. This will take you 31 months and cost you a total of £6,065.61. Thus, you've paid interest of almost £1,066 during this period.
However, by making use of 0% balance-transfer deals, you can repay your debt faster and slash your interest bill to zero. By moving your £5,000 to a card offering a lengthy 0% deal on transferred balances, you can avoid interest for a year or more.
Back to our example: let's say you move your five grand to the table-topping Virgin credit card, which offers 0% on balance transfers for fifteen months, on payment of a fee of 2.98%. Thanks to this fee, your balance jumps to £5,149, but you now pay no interest. Thus, when this interest-free period is up, your debt has fallen to £2,149, as you've made fifteen monthly repayments of £200.
Being a crafty `rate tart', you shift this balance to another 0% credit card just before your time's up. This time, you go for the Tesco credit card, which charges a fee of 2.5% for thirteen months of interest-free fun. After paying this fee, your debt rises to £2,202.73. Thanks to your monthly repayments of £200 (and a final extra payment of £2.73), your debt is cleared after eleven months.
So, let's recap: by playing your 0% cards right, you've enjoyed 26 months of interest-free credit. This costs you £149 and £53.72 in fees, a total of £202.73. Thus, by surfing your debt across two 0% balance transfers, you've paid £202.73 instead of the interest of £1,065.61 charged by your previous plastic. That's a saving of £862.89, which is well worth having.
The real problem is reckless lenders and eager borrowers
Therefore, in the right hands, 0% credit cards can be a force for good, enabling borrowers to become debt-free cheaply and quickly. On the other hand, I agree with Mr Duncan that, in the wrong hands, credit cards can become WMDs: Weapons of Money Destruction!
I also concur with Mr Duncan that irresponsible lending has contributed greatly to the UK's fifteen-year borrowing binge. By lending freely to anyone with a pulse, the banks have fuelled our `live now, pay later' culture. Then again, we borrowers must also share the blame, as no-one forced us to `keep up with the Joneses' by feasting on credit!
Also, I believe that Mr Duncan's fears would be eased if banks agreed not to extend further credit to those already burdened with debt. For example, when a cardholder switches a balance from card A to card B, card A should be closed in order to prevent the customer from doubling his/her access to credit. Limiting their access to credit would certainly help to prevent cardholders' debts from spiralling out of control.
Finally, I was once £50,000 in debt across thirteen credit cards and three personal loans, so I know at great cost how easy it is to create a deck of credit cards. If your debts are making you anxious, stressed or depressed, then it's time to `turn the tanker around'. Start with a visit to our Get Out of Debt centre and our Dealing With Debt discussion board. Good luck with dynamiting your debts!
More: Find cracking credit cards via the Fool | Eight Ways To Be A Better Borrower | Free Yourself From Credit Card Debt