Banks are continuing to cut interest-free period on zero per cent credit cards – and it means borrowers have to pay more to dodge high interest rates, according to financial data firm Moneyfacts.
These interest rates are also rising, with the average purchase APR on a credit card now 34.5 per cent, the highest level since Moneyfacts started keeping records in June 2006.
Not only this, but the balance transfer fees on top zero per cent cards are also rising, meaning customers have to pay more to consolidate debts.
Barclaycard, Virgin Money, MBNA and Halifax have cut either their zero per cent introductory purchase or balance transfer offers since the start of October 2023.
Piling up: Credit card providers are tightening terms on zero per cent cards for consumers
There are two sorts of zero per cent credit cards – purchase and balance transfer.
Purchase credit cards let customers buy items, whereas balance transfer cards are mostly used for consolidating debt.
Moneyfacts also found that the length of the top interest-free terms has shortened over the past 12 months.
The longest zero per cent period on a purchase credit card is 21 months, from the Barclaycard Platinum All-Rounder Visa.
But a year ago the best equivalent card, the Sainsbury’s Bank Dual 24 Month Offer Credit Card Mastercard, had zero per cent interest for 24 months.
Zero per cent interest credit cards work by letting consumers borrow with no additional charges for a set period, after which a higher interest rate applies.
A balance transfer fee is paid on the money you move onto a zero per cent card.
The longest introductory 0 per cent term for balance transfer cards now is 29 months, from Barclaycard, which comes with a 3.45 per cent balance transfer fee.
But a year ago the best deal was considerably more generous. In November 2022 the top term was 34 months at zero per cent interest, from Sainsbury’s Bank, with a lower balance transfer fee of 2.88 per cent.
So in other words, a year ago customers who wanted a balance transfer credit card paid less to put debt onto it and then had longer to pay it off.
Rachel Springall, of Moneyfacts, said: ‘Credit card providers can pull back on zero per cent offers if they feel there is an element of risk to offer such lengthy terms in a changing market.
‘We have seen in previous years where debt warnings have been evident, providers can and have reduced interest-free offers.
‘Whilst we are not seeing a mass exit of lengthy terms of indeed withdrawals right now, the reductions we have seen is at a typically seasonal time for consumers to look for new deals – Black Friday, the run-up to Christmas – and a tightening of 0 per cent offers is not a great sign for customers shopping around.’
What credit card changes mean to consumers
Purchase credit card interest-free terms shortening
Cuts to interest-free periods mean someone taking out the best purchase credit card today, borrowing £5,000 and aiming to repay it within the 21-month term would have to repay £238.09 a month.
A year ago the same individual would have paid £208.33 over 24 months, or £29.75 less per month.
Credit card interest rates rising
If someone borrowed £1,000 on a credit card that charges 34.5 per cent, but made £100 in fixed repayments, it would cost them around £165 in interest and take a year to repay.
If they stuck to repaying £50 per month, it would take twice as long to repay and cost around £400 in interest, Moneyfacts said.
Balance transfer credit card fees rising
Increases to balance transfer fees mean someone putting £5,000 of debt onto a zero per cent interest card would pay £172.50 to Barclaycard, which has the longest no-interest period.
But that fee would have been £144 on the equivalent top credit card a year ago, or £28.50 less.