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Consumers clear debt a year early due to lenders 0% interest squeeze

Abigail Fenton
Young woman checking bills, taxes, bank account balance and calculating credit card expenses at home
The maximum term for interest-free transfers has been slashed, credit experts warn. Photo: Getty

Consumers looking to take charge of their debt in the new year may struggle to find a deal that lasts long enough to clear their debt interest-free, experts have warned.

Research by credit experts TotallyMoney and MoneyComm found the maximum term for interest-free transfers has been slashed 32.6% in just two years, from 43 months in January 2017 to just 29 months in November 2019.

Meanwhile, 0% interest has dropped from an average of 25 months to just 17.9 months — or 28.4%.

READ MORE: Big drop in interest-free credit card deals leaves festive shoppers out in the cold

The data shows that January is the busiest month for balance transfers. Last January, consumers made 701,000 transfers, worth £1.5bn.

And 0% balance transfers continue to outweigh the transfer fee, with the average consumer transferring £2,200. They would “earn back” a one-off fee of 3% — £66 — in just seven weeks of zero-interest rather than paying 19.9% APR.

READ MORE: One in five adults rank their financial well-being as 'poor' or 'very poor'

Lenders are “shrinking the balance transfer honeymoon period”, after which the enticing 0% interest rate disappears and a much higher rate kicks in, TotallyMoney said.

“It suggests lenders are eager to recoup their money in less time, but that leaves consumers at risk. If they don’t pay off their debt by the deadline, they could incur punishing interest rates that trap them in a cycle of debt.”

Resolution solution

Customers seeking the best 0% deal to ring in 2020 should move fast — before lenders cut the honeymoon period even further, the experts advised.

Every January, consumers resolve to take control of their finances. In the month of January over the last three years consumers made over 700,000 balance transfer deals, adding up to over £1.5bn.

READ MORE: Why you are getting 0% back on your money and what to do about it

Time is money

Despite one-off fees and fewer months at the 0% rate, balance transfers are still worth considering, TotallyMoney said. The average consumer would save the cost of their transfer fee in just over seven weeks of not paying 19.9% APR — and still enjoy months of additional savings from zero interest charges.

However, despite today’s average term of 17.9 months with zero-interest being tempting, it is significantly lower than before.

Just two years ago, credit card companies granted up to 43 interest-free months, but today’s maximum is just 29 months. That could mean 15 extra months of paying interest, at a cost of £621.87.

READ MORE: Lower interest rates mean more babies, according to Bank of England

With fewer months at the 0% rate, consumers now have less time to pay off debt without penalty.

The stress of rising debt “is only part of the problem”. Many people rely on 0% borrowing just to stay afloat. “The reduction in 0% deal terms could be a ticking time bomb for some consumers,” TotallyMoney said.

Even though the 0% market is less attractive as interest-free periods shrink, there is no let-up in demand, with over half a million transactions each month, valued around £1.2 billion.