Borrowing has never seemed so attractive at a time of record credit card deals and resurgent household debt. Now, even P2P lenders are getting in on the act…here is what you need to bear in mind
As 2017 gets underway, many of us will still be suffering the after-effects of a lavish Christmas. Debt charities warn that January will be one of their busiest periods ever, with over five million people expected to have debt problems following the festive period.
Now, banks and other financial firms are jumping on the New Year debt bandwagon, launching credit cards that could trap people in debt for years to come.
These 0 per cent balance transfer deals offer record interest-free periods for borrowers, who can use the time to repay what they owe without charges. In reality, two thirds of credit card customers will fail to clear their debts before the interest-free window ends, with an APR of up to 21 per cent kicking in thereafter.
The longest 0 per cent period yet, offered by MBNA, lasts for 43 months, with cashback of £20 if £1000 is transferred within 60 days. The balance transfer fee is 3.29 per cent. Others, including Sainsburys Bank, are offering 42 months interest-free borrowing, along with Barclaycard and nuba.
The amount being shunted onto 0 per cent balance transfer cards has crept up in the last six years, from £820 million in January 2010 to £1.36 billion in January 2016, according to statistics from the British Bankers Association. The number of people using these deals has also risen, from 412,000 to 588,000 over the same period.
At the same time, household debt has rebounded to levels not seen since the aftermath of the financial crash. Data released by the Bank of England this week showed personal debt grew 10.8 per cent in the year to 30 November to £192.2bn in the UK – the highest level since December 2008.
Peter Tutton, head of policy at StepChange Debt Charity, said: “Alarm bells should be ringing. Previous experience shows how such increases in the levels of borrowing can leave households over-indebted and vulnerable to sudden changes in circumstances and drops in income that can pitch them into hardship.”
Andrew Hagger, founder of Moneycomms, said: “With the total amount outstanding on credit cards up by £2.5 billion in the last 12 months, and now at £63.1 billion, you start to wonder how much longer this credit spree will last before lenders put the brakes on.”
The statistics come as the consumer debt industry attracts an unlikely new entrant in the form of a peer-to-peer (P2P) lender. The Money Platform has now been granted a banking license by the Financial Conduct Authority to offer a more affordable alternative to payday lenders.
The website operates much like other traditional P2P lenders, connecting savers directly with borrowers and cutting out the middle man in order to save costs. However, The Money Platform only deals in short-term loans worth up to £1000 and lasting between three and 12 weeks. The platform has had 1255 applications but only approved 82 loans since launch. It may soon be followed by another P2P payday lender, Welendus, which is still awaiting regulatory approval.
With an APR of 165 per cent, the total cost of borrowing £1,000 from The Money Platform for four weeks is £112. While this is cheaper than payday lending, experts say it is more expensive than overdrafts and credit cards (if they are used sensibly).
Stuart Carmichael, chief executive of the Glasgow-based Debt Support Trust, said Halifax, Bank of Scotland, NatWest and Royal Bank of Scotland all allowed customers to borrow £1000 for 30 days in an arranged overdraft at an APR of 19.89 per cent. The total cost of borrowing, including a £6 monthly fee, would be £21.02.
He also pointed out that a borrower wouldn’t need to apply for credit cards with huge interest free offers, usually reserved for those with top credit scores. “If it’s a short term loan that’s required, an interest free credit card for one month would be the best option. Borrow the £1,000, repay it after four weeks and pay no interest.” Even if the borrower could not repay in time, a typical APR of 18.9 per cent would still be cheaper than P2P lending.
He added: “The two main questions for borrowers are; why is the credit required and how certain is the borrower that they can repay the money in a set time period? If the money is essential, having a repayment plan and knowing when the debt will be fully repaid is vital. After Christmas and New Year, most people are cash-strapped and it’s a financially challenging time, but borrowing more money can in fact make the situation worse for longer. If overdrafts and credit cards have been exhausted, it’s time to seek debt help, not prolong financial difficulties.”
Charles Balcombe, co-founder of The Money Platform, said: “We believe that we are one of the most cost effective short term loan options available in the UK. Whilst credit cards can be cheaper, our research has found that many people prefer the ability to borrow a sum and repay it in full as quickly as possible, instead of constantly having credit card debt looming over them every month.
“Our type of customer is not pigeon holed by economic or social standing, but they will be in full time employment and have a strong credit rating. We have created a marketplace that offers short term financial relief for an individual or household with an emergency or surprise cost, for example if their boiler blows and needs replacing. We also cater for people who spontaneously want to purchase something, such as a last minute holiday.”
While we maintain a critical stance towards payday lending on the Young Money Blog, we recognise that credit cards CAN have their place in our finances, if only because it can be highly difficult to obtain a mortgage and similar forms of (arguably) more salubrious ‘debt’ without building up a credit history. But credit cards only work if we manage them smartly. Young people need to strictly follow these rules if they want to avoid getting in serious trouble;
- understand WHY you’re using a credit card and ideally, have it for a specific purpose rather than general spending
- Budget hard to ensure that you’re not becoming reliant on credit to cover all your expenses and make sure you close down any credit cards you no longer need
- Make sure all spending is covered by income and that you are paying off as much, if not all, the balance each month
- use a 0 per cent balance transfer card to avoid paying interest and schedule the transfer of this card to another interest-free deal before the teaser deal ends
- setting up a direct debit is the easiest way to ensure you are making your payments on time
- never ever cover just the minimum repayment levels; your debt will last so much longer and you’ll pau a huge price for it
- if in doubt, leave it out – credit cards are only for those who have a guaranteed income and can remember to close or transfer them before the interest-free window end