Credit card time bomb looms for borrowers

While record low interest rates may be bad news for savers, borrowers are enjoying spending cheap, or even free, money to never before seen levels. But industry figures have now issued a warning that millions of people could be sitting on credit card time bombs.

There has been a huge boom in interest-free credit cards in recent years. There are now 67 deals that charge no interest on balance transfers for two years or more up from none five years ago.

The demand is definitely there. We currently owe £67.7bn on plastic, an average £2,500 per household – and millions of us are moving that debt onto interest-free credit cards. According to the British Bankers' Association, there were 609,000 balance transfers to zero per cent credit cards totalling £1.34bn in March alone.

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An interest-free credit card can be a great way to get on top of your debt. They give you breathing space to pay off your debt without it growing any further. But, the concern is that not everyone is clearing their borrowings - and when those interest-free period ends some could be in for a nasty shock.

“Although these zero per cent deals are popular, you have to wonder how many people are simply treading water with a balance they are struggling to make real inroads into,” says Andrew Hagger, a personal finance analyst and the founder of Money Comms, in The Times.

The abundance of interest-free credit cards out there is “dangerous” according to former pensions minister Baroness Altmann.

“This is irresponsible lending and could endanger financial stability for years to come,” Altmann told the Daily Mail. “Zero-per-cent initial rates could lure people into a debt trap.”

A recent report from the Financial Conduct Authority revealed that around 3.3 million of us have built up credit card debts that we will never be able to clear.

As we all spend more on plastic, then many of us move that money to an interest-free deal, the worry is we aren’t thinking about how we are going to pay off our debts. But, your debt will only be interest-free for so long, then the interest will rocket.

“Many customers end up with more debt because there is no incentive to repay, and they can easily be caught out by not being able to transfer the balance to another product at the end of the interest-free period,” says Antony Elliott, chief executive of the Fairbanking Foundation in The Times.

“There are also traps in that if a payment is missed, or a limit exceeded, the zero per cent interest phase ends immediately.”

With the average interest rate on a credit card currently 22.6 per cewnt APR, according to Moneyfacts, the end of a zero per cent deal could bring a sharp increase in what you owe.

If you have got debt on credit cards moving it to an interest-free deal makes sense, just make sure you have a plan for how you will clear that debt. The simplest solution is to take what you owe, divide it by the number of months left on the interest-free deal then set up a monthly direct debit for that amount. That way you guarantee the debt is cleared before interest is due.