Banks have slashed the number of zero-interest credit cards available and tightened lending criteria, limiting the options for borrowers juggling their debts between cards.
The length of balance transfer deals reduced markedly and the availability of unsecured debt decreased towards the end of 2019 as lenders became more nervous about the UK economy, research by the Bank of England found.
Lenders expect a pick-up in demand for credit card borrowing in the first quarter of this year, with experts predicting that consumers will seek to switch cards to lower the interest they pay on their Christmas spending.
But tougher lending criteria could mean that borrowers are unable to switch to another zero-interest card when their current deal ends, significantly increasing the cost of their monthly payments.
Financial website Moneyfacts says the number of cards that allow balance transfers has dropped by more than a third in the past three years to reach a record low.
There are currently 76 balance transfer deals available, compared to 122 in January 2017, while the longest interest-free period on the market has dropped from 43 months to 29 months. The fees lenders charge to move debt have also increased.
“Those consumers who used a credit card to pay for some of the festive season may be looking to acquire a 0 per cent balance transfer card, but if they do then they would be wise to make fixed repayments,” said Rachel Springall, a finance expert at Moneyfacts.
“For instance, someone with a £3,000 debt that paid £150 back as a minimum per month would clear the debt in 20 months, but there are cards that can default to a repayment of just 1 per cent plus monthly interest – so their debt would hang overhead for much longer on this basis.”
The changes have come partly in response to a crackdown by the Financial Conduct Authority on lenders profiting from customers who are in persistent debt and have no plan in place to pay it off.
Under rules announced in 2017, the watchdog required credit card companies to take steps to help customers repay their balances more quickly and offer further assistance to those who cannot.
Sarah Coles, a personal finance analyst with Hargreaves Lansdown, said: “If you’re a committed ‘rate tart’, regularly shifting balances when the 0 per cent introductory period runs out, you might fall foul of these tightened criteria and struggle to get another deal.
“If you apply for cards and get turned down this will damage your credit score further, so it’s worth using an online eligibility calculator, which only does a soft search of your credit record so won’t affect your score.
“If you can’t get a long 0 per cent introductory period, you may want to consider a card that targets borrowers with less impressive scores – which tend to offer less than six months interest-free.
“However, it pays to take stock more generally. Shifting from one 0 per cent deal to another risks racking up transfer fees, and unless you’re very disciplined it can tempt to you keep building more and more debt. If instead of gradually paying the debt down you’re seeing the balances increase, you need to make a change and reconsider your spending habits so you can start paying it back before your debt becomes a problem.
“Once you’ve drawn up a budget, you can tinker with the spending figures to free up cash to pay down your debts each month. Don’t rely on being committed to manually making the payments, though – it tends to be much more effective to set up a direct debit to repay it straight after payday so you don’t get a chance to spend it.
“While you’re repaying your debts, you should try to pay as little interest on your debts as possible. One option is to find a low-interest loan. This has the advantage of being for a fixed sum, so you’re not tempted to dip in over and over again when you’re meant to be paying it off.”
The latest figures come as the government was urged to tackle a sharp rise in the use of expensive consumer credit among lower-income households.
The Resolution Foundation thinktank found that low income households have racked up borrowing on loans, credit cards and other consumer debt faster than any other group since the financial crisis, leaving them over-exposed to another economic shock.
Much of the rise in consumer credit since the financial crash has been on high interest products including store cards and overdrafts charging rates averaging 20 per cent.
There were some signs earlier this month that the boom in consumer lending may be drawing to a close, as separate research by the Bank of England showed that UK borrowers made net repayments on their credit cards for the first time since July 2013. The total amount borrowed on credit cards dropped by £600m to £72.1bn. Overall consumer lending is at £225bn.