Why are we paying interest on '0%' deals?

julia kukiewicz
By Julia Kukiewicz

0% interest©iStock.com/TimArbaev

0% BALANCE transfers are among the UK's most popular credit card deals.

That's because they've got a clear goal and a big, positive promise: they can help you get out of high-interest credit card debt.

But research released by Sainsbury's Finance in November 2011 made us think a little bit deeper about these deals.

The researchers found that millions of those with 0% balance transfer products weren't paying off their debts in the introductory period and, instead, were letting the debt start to accrue interest again, severely reducing the benefits of the deal.

So why are we paying interest on these 0% deals, often after shelling out for transfer fees in the first place?

How many people pay for 0% deals?

The Sainsbury's research interviewed a random sample of 2004 UK credit cardholders.

32% of the sample said they would be looking to take out a new credit card 'between September 2011 and October 2012' because their current 0% introductory deal had expired.

If we assume that the sample is fairly representative Sainsbury's reckon that translates to about 2.5 million credit card holders paying interest again after a 0% deal has ended.

The vast majority of those, the equivalent of 1.9m credit cardholders, said they were looking to move debt with a balance transfer.

The rest were looking for a new 0% purchases deal which doesn't concern us here since they could start paying off their balance in full every month.

There are about 31.2 million UK credit or charge card holders according to the UK Cards Association.

In all, we could say, with just a little scepticism, that about one in every twenty credit card holders has done this.

Why are we paying for balance transfers?

However many exactly, however, the research findings mean that cardholders are paying, on average, an 18.2% APR on a debt they've already moved once to avoid paying high interest rates.

And when they move it to their new balance transfer deal they'll have to pay out again, in the form of a balance transfer fee.

Typically that's 3% of the balance value.

External pressures

Stagnant wages and the rising cost of living might explain, in large part why those with 0% balance transfer deals are failing to pay off the full balance they transferred within the interest-free period.

Yet we can surmise that, for the majority of credit cardholders, those are pressures which haven't got significantly worse since the time they took the 0% deal out.

We're four years past the shocks of late 2008 now.

Irrational behaviour

So, why? Perhaps the answer lies in a piece of research from back in 2002 [pdf].

Researchers investigating the effect of age groups on consumer behaviour looked at 14,798 accounts for a credit card that offered poor value for money, in the form of high interest rates, when holders made purchases on it.

A third worked out the optimal way to use the card straight away, researchers noted, they never spent on the card.

Another third worked it out within a few months, and with some interest charges to alert them.

But a final third continued to spend on the balance transfer despite the fact that it was an added expense at a time when they were already trying to pay off one debt.

They never worked out the credit card trick and it seems likely that many of today's multiple balance transfer users (it's not quite right to call them 'tarts' since they're paying interest) are missing a trick too.

In that final third, the researchers found, were the youngest and the oldest members of the credit cardholding cohort.

Paying less for 0%

On an individual level, it's easy to see how credit cardholders could have avoided eventually paying interest on their balance.

On the site and elsewhere we constantly emphasise making a budget, getting all the best information about moving money before application or taking a cheaper life of balance transfer deal where appropriate.

The point of all this isn't just to point out that, like previous statistics have also shown, sometimes people don't make the best decisions for their finances: who doesn't?

We know that, time and time again, the most vulnerable groups prove to be those that need extra cash the most, those most likely to fall into unmanageable debts and those least likely to know the credit card tricks that save money.


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