Surge in 0% credit deals is ‘ticking time bomb’
‘Luring people into a debt trap’
THE boom in interest-free credit cards is a ‘ticking timebomb’ that could blow up in the faces of lenders and borrowers, experts have warned.
There are now 67 deals that charge zero interest on balance transfers for two years or more – up from none five years ago.
Nineteen are for three years or more, with the longest – offered by MBNA – lasting for 43 months.
Some lenders also charge no interest on new purchases, encouraging households to go on guilt-free shopping sprees – fuelling a £12billion surge in credit card borrowing over the last five years.
Industry experts last night warned these deals are storing up trouble for both households and banks.
After the introductory period ends, the interest is suddenly hiked to around 19 per cent or more, leaving those who have not paid off their cards in full facing huge bills.
Former pensions minister Baroness Altmann described the cards as ‘dangerous’ and said they were luring millions into a ‘debt trap’.
Senior bankers also warned of serious implications for the banking sys- tem. Many lenders book upfront the revenues they expect to gain once the interest-free period comes to an end – even though there is no guarantee they will get the money.
One chief executive, who wished not to be named, told the Financial Times it was a ‘ticking time-bomb’.
He compared the situation to the accounting scandal at Tesco in 2014, when the company admitted it had artificially inflated profits by £326million by booking payments from suppliers before the money arrived.
Steve Pateman, chief executive of Shawbrook, a challenger bank that does not offer interest-free credit cards, said: ‘The danger is you are booking revenues based on something you believe will happen and there is an inherent risk your assumptions don’t pan out that way.’
It is thought that Virgin Money could be more exposed than others banks after aggressively pushing its 41-month 0 per cent balance transfer card – on which £2.2million day is being piled. Analysts at investment bank KBW said Virgin Money could lose about 18 per cent of earnings this year if it stopped booking upfront its expected future credit card revenue. But Virgin Money said only 0.78 per cent of its credit card balances were two or more payments in arrears, compared with the industry average of 2.4 per cent.
A recent report by the City watchdog revealed around 3.3million people are saddled with credit card debts they may never be able to clear. British families now owe a record £67.3billion on credit cards – around £2,500 per household – up from £55.7billion five years ago.
The 9.3 per cent rise in credit card debt is the biggest increase since before the financial crisis.
Baroness Altmann said: ‘ This is irresponsible lending and could endanger financial stability in years to come. Zero per cent initial rates could lure people into a debt trap.’
Richard Koch, head of policy at trade body the UK Cards Association, insisted all applications were subject to affordability checks and said such offers saved customers money, while making terms and conditions clear.