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0% credit cards could disappear

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31/03/2010
The highly popular 0% balance transfer credit card deal could soon be a thing of the past, with the Government launching a raft of measures to tighten up lending rules.

The 0% balance transfer card allowed millions of consumers to switch their debts from one card to another for a small fee, and pay no interest on the debt for about six months or even longer.

The card company would make money by encouraging consumers to use their plastic to buy things, or take money out of a cash machine. These activities would incur interest, often at rates of about 18% or more.

 However, the Department for Business, in a move that has been widely welcomed, has stopped the “swizz” of credit card companies insisting that any money paid off was used to repay the cheapest debt first, trapping the expensive debt on the card for as long as possible.

Kevin Brennan, the Consumer Affairs minister, said:

“Our consumer research showed that most consumers didn’t know this was happening and they felt this practise was a bit of a swizz.”

Banks have now agreed, as part of a voluntary deal, to pay off the most expensive debts of a credit card first. The Department for Business has calculated this move will save consumers £296 million, equating to £7 for each adult in a year.

Some experts have warned, however, it could punish so-called “rate tarts”, savvy consumers who move their debts around from one 0% card to another.

Richard Thompson, partner at PricewaterhouseCoopers, the accountancy firm, said: “This will make 0% balance transfer offers a less effective means of customer acquisition and will prompt the industry to innovate to attract new customers.”

Peter Harrison, credit cards expert at moneysupermarket.com, said:

“Our own research shows that almost two-thirds of consumers don’t realise that the cheapest debt is paid off first on the majority of credit cards. This lack of understanding of the current repayment hierarchy system means many end up paying a huge amount of interest and the debt sentence can last for years.

“However, cardholders should be aware that this change in payment order may have some unintended consequences, for example a reduction of 0% balance transfer deals.”

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