Balance Transfer Guide

Transcription

1 Balance Transfer Guide 1

2 Balance Transfer Guide Having been established for over 50 years, the UK enjoys one of the most competitive credit card markets in the world. Numerous businesses, from high street banks to specialist card issuers, vie for our custom with innovative and diverse products. Nevertheless, despite the diversity of choice, one credit card category remains far and away the most popular with UK consumers, the ever popular balance transfer card (also commonly referred to as the 0% card, transfer card, interest-free card or the zero interest card). What are Balance Transfer Credit Cards? Before balance transfer products became commonplace, credit cards were principally intended to simplify transactions. Consumers would use their card to make purchases. In doing so, they would then enjoy up to 56 days interest-free, together with the enhanced consumer protection afforded by credit cards in the UK. On receiving their statement, they would either clear their balance in full or start accruing interest on the remaining balance at their specified interest rate (APR). For those paying interest, the rates charged often reached well into double digits (considerably more than might be charged for a personal loan currently) and this chargeable interest applied until they cleared their balance. These high-interest rates, together with the effect of compounding interest (interest accrued on previously accrued interest), and prohibitive payment hierarchies (which ensured payments were used to clear lower interest debt before more expensive debt), left many in a spiral of debt. The arrival of balance transfer cards in the UK market marked a radical shift in the balance of power between the card issuer and customer. For the first time, consumers could transfer their balance from one card issuer to another at a lower rate of interest (often now 0%) for an introductory period. No longer were they tethered to one issuer, who had no incentive to offer competitive interest rates. By making debt 'portable' between card institutions and enabling consumers to shop around for better deals, balance transfers transformed credit cards from a high-interest credit product into an attractive vehicle for low-cost personal debt. 2

3 The History of Balance Transfers Although balance transfer products are now synonymous with the UK credit card market (UK consumers enjoying the longest balance transfer periods in the world), it was in the United States that balance transfer cards first appeared. The first ever balance transfer card was launched by Signet Bank (Virginia) in 1992, on the recommendation of two consultants brought in to manage their credit card business, Richard Fairbank and Nigel Morris. Fairbank and Morris harnessed increasing sophisticated computers to segment prospective customers using lifestyle and credit file data. In applying these insights, they demonstrated they could minimise card issuer losses by targeting products to customers based on their particular risk profile. Better targeting enabled them to scrap annual fees for some customers (which were often charged to mitigate the high risk of mass lending to relatively un-profiled applicants). It also freed them to develop new credit card propositions, including balance transfer cards, which were primarily introduced as a customer acquisition tool to target more affluent people. Initially, their ground-breaking approach met stiff opposition from senior executives trained in more traditional banking methods, but when Fairbank and Morris used it to fuel their outbound marketing strategy, combining enhanced customer segmentation with compelling product propositions, they quickly proved its worth. In 1994 Signet Bank spun off its credit card business as 'Capital One', but it soon outgrew its parent. In 1995, Signet Bank was bought by First Union Corporation, but Capital One remained independent, becoming a big bank in its own right. From its roots in the United States, the balance transfer concept quickly crossed the Atlantic as Capital One and other new credit card issuers entered the UK market in the early to mid 1990s. How do Balance Transfers Work? Balance transfer credit cards allow holders to transfer balances (debt) held on existing cards to a new credit card. The specific rates vary by product and customer (only 51% of accepted applicants must be given the advertised price), but competitive forces mean they tend to be set at 0% for an introductory (or 'teaser') period. 3

4 Although balance transfer cards are often referred to as '0% deals', they do have associated costs; the 'balance transfer fee' being the most common. Balance transfer fees are processing fees paid by customers to their new card issuer for making the transfer (their previous card issuer receives nothing). Transfer fees tend to be calculated as a fixed percentage of the total transfer (with a minimum transfer fee to discourage transfers for smaller amounts). Often, transfer fees are not paid 'up front' and can enjoy the same 0% rate as the balance itself. For many years, most transfer products competed with broadly similar fees (around 3%). However, as introductory periods increased beyond the needs of many customers, so card issuers have started to aggressively compete on the fees charged. As a result, some cards now charge no transfer fee whatsoever, while cards with longer promotion period often offer discounted fees or fee refunds. How to Transfer a Balance Much of the appeal of balance transfer cards is the simplicity with which transfers can be made. Often, this is as simple as completing a few details about the existing card within the credit card application form, or supplying these details to the new card issuer when the card is activated. Balance transfers typically clear in around five working days. Once processed, the debt with the original card supplier will stop accruing interest, and the account can be closed. Balance transfer considerations Although transferring a balance is a relatively straightforward process, there are things consumers should be aware of to help maximise their transfer: Customers offer a new credit limit lower than their current balance will not be able to transfer their full balance. Also, terms often stipulate that the total credit limit cannot be used for transfers. Once the introductory period has expired, balances incur interest at a far higher rate (at which point a new transfer card should be sought). Transfers are not usually available between two cards issued by the same bank or financial group. This can cause some confusion as the same institution often markets products using different brands. 4

5 Failure to make minimum payments in full and on time result in the withdrawal of any promotional terms The advertised rate must be offered to 51% of accepted applicants, but almost half of the accepted applicants may get a different rate from the one they applied for. If you are looking to use your credit card to purchase, balance transfer cards are not necessarily the best option, because the interest charged on purchases is far higher than the transfer teaser rate. Although by law payment hierarchies now ensure the most expensive debt is cleared first, products offering 0% interest on purchases ensure interest is kept to a minimum. Card issuer minimum payment calculations differ, which can mean minimum payments actually increase when switching to a 0% deal. 5