17th November 2015
Zero per cent credit cards are leading to a worrying increase in people’s debt levels, a charity has warned.
New research by the Fairbanking Foundation suggests that 29% of people who took out 0% cards for spending or balance transfer ended up with more debt
Its study shows 41% of people who have taken out a 0% credit card for spending and 45% of people who took out a card to transfer an existing balance failed to clear the debt at the end of the period.
When looking at the reasons why they ended up with more debt, 28% said it was because their new credit card had a long interest-free period which they felt ‘encouraged’ them to do this.
Just over one in four said their credit card offered them access to new interest free credit which they used, and 22% said the long period of not having to pay any interest meant they were not focused on repaying their debt.
Similarly, since 2010 10% of people claim they have taken out a personal loan for debt consolidation purposes that resulted in them owing more.
Nearly one in five (19%) of these people said this happened because they used their loan to consolidate other debts so they could borrow more.
Just over one in ten (11%) said they ended up with more debt because their bank offered them access to a higher amount of credit than they applied for.
Overall, Fairbanking Foundation says these issues contributed towards 21% of people claiming they have had debt problems over the past five years.
The charity’s research has been welcomed by companies which have dropped so-called teaser rates.
Les Matheson, chief executive of NatWest and RBS Personal and Business Banking, says: “We want to be the bank that helps customers out, not catches them out, so we’re pleased that this research from The Fairbanking Foundation helps to highlight this important issue. We don’t think this is good for our customers and has no place in financial services.”
Richard Rolls, head of operations at Capital One says: “Balance transfer deals which offer a fixed long-term rate – up to 37 months with some providers – can be useful for some people.
“However, the worry with zero per cent teaser deals with long pay-off periods is they encourage people either to take on more debt, or forget about the money they owe – that is until the long-term interest-free period ends. The Fairbanking Foundation research shows too many credit card customers end up worse off as a result of taking up such an offer.”
Antony Elliott, chief executive of Fairbanking Foundation says: “It is genuinely alarming that 29% of credit card customers taking out zero per cent offers for spending or balance transfers end up with more debt.
“Used sensibly zero per cent deals can be useful but it is clear they are also encouraging significant numbers to take on more debt and can be detrimental to helping people manage their finances in a proper way.
“It would be better to offer credit cards with consistently attractive rates which don’t encourage people to spend beyond their means. Banks and other finance companies have a duty of care to ensure that people are not taking on too much debt.”