Credit card debt warning: why balance transfer deals may begin to worsen

If you have debt on a credit card and you're being charged interest, a balance transfer credit card could slash your interest rate to zero. While there are still a number of generous balance transfer deals out there, it's likely that the market could turn in future.

So, if you are paying interest on credit card debt, it's probably better to act sooner rather than later. Here's everything you need to know about why balance transfer deals may be about to worsen.

In brief: How a balance transfer credit card works

A balance transfer credit card repays debts on old cards for you. So, if you bag yourself a balance transfer credit card and shift your existing credit card debt to it, you'll owe your new balance transfer card instead.

As balance transfer cards usually come with a interest-free period—usually lasting for several months—any debt you shift across will be covered by this 0% period. This makes it easier to clear your balance as more of your repayments will go towards reducing your debt, as opposed to servicing interest. This can help you become debt-free quicker.

Top tip! Bear in mind any transfer fees

While some balance transfer cards are fee-free, the longest deals usually charge you a percentage of anything you shift across. For example, you'll pay a £62.50 fee if you shift £5,000 debt to a balance transfer card with a 1.25% transfer fee.

While nobody enjoys having to pay fees, balance transfer fees are usually far smaller, in comparison, to the interest you would have had to pay if you had not moved your debt to 0%.

What has the balance transfer market looked like in recent years?

0% lengths on balance transfer credit cards have been enormously generous over the past half-decade or so, with 2017 the 'golden period'. Back then, the longest balance transfer 0% deal topped 43 months.

While 0% deals on the market-leading cards have since shortened, interest-free periods exceeding 30 months are still available. In fact, cards have actually become more generous over the past year, following a pandemic lull.

A year ago, the longest 0% balance transfer card offered just 29 months at 0%, compared to 34 months today. Similarly, the longest no-fee 0% deal has increased over the past 12 months. In June 2021, the top no-fee card offered 18 0% months, compared to 22 months today.

Why might balance transfer deals begin to worsen?

While 0% balance transfer lengths have increased over the past year, there are no guarantees deals will continue to improve. This is because 0% credit card deals are heavily influenced by borrowing costs. Let's take a look at this in more detail.

How borrowing costs can impact balance transfer deals

Over the past decade or so, the cheap availability of credit has become the norm in the UK. This is mostly due of the Bank of England, which has kept its base rate—the rate at which banks can lend to one another— at rock-bottom levels.

For a period lasting 13 years, between March 2009 and March 2022, the Bank of England's base rate has been sub-1%. This has meant lenders have been able to borrow off one another for next to nothing. This is why savers have had to put up with misery savings rates in recent years. After all, why would banks reward savers with high interest rates when they can borrow at next to nothing on the open market? In other words, a low base rate has allowed banks to sidestep the need to attract saver's deposits.

The low cost of borrowing is also the reason why banks have been able to dish out juicy 0% credit card deals left, right and center—including on balance transfer cards. While banks won't make any meaningful profit when a customer is using his/her 0% period, they ultimately hope that customers will forget (or be unable) to repay their balance before the end of any interest-free period. That's because after a 0% period ends, banks can then charge hefty interest on any leftover debt. This can be a profitable strategy indeed.

...but interest rates are now starting to rise!

Now we've explored how generous 0% credit card deals are closely linked with the low cost borrowing, it's really important to note that the UK's era of 'cheap credit' may now, finally, be coming to an end.

Already in 2022, the Bank of England has raised its base rate on five occasions. At the turn of the year, the base rate stood at just 0.25%. In February it was raised to 0.5%, and again to 0.75% in March. In May, the Bank of England raised the base rate further, to 1%—its highest rate since 2009.

Since then, the base rate has since risen to 1.75%, and many expect it to go up again when the bank's Monetary Policy Committee next meets on Thursday 22 September.

Remember, every time the base rate rises, borrowing costs go up. This essentially means 0% credit card deals become more expensive for lenders. While a few rate rises are unlikely to end 0% credit card deals entirely, successive rises are likely to have a notable impact on the length of deals. As a result, it's fair to say that the end of the most generous balance transfer credit deals may just be around the corner.

How can you find the best balance transfer deals?

With the risk of the balance transfer deals worsening, if you're currently paying credit card interest, it's best not to wait. Right now you can up to 34 months at 0% for a 2.88% transfer fee, or up to 22 months with no fee.

To explore these options and more, take a look at our best balance transfer credit cards guide.

What should you do if you don't get the card you apply for?

To get your hands on any type credit card, you must first be accepted. This is why having a decent credit score is very worthwhile when it comes down to getting the best deals.

However, if you apply for a card and don't get accepted, you may have to consider less generous deals. For example, in such a scenario, you may have to settle for a card with a shorter 0% period, or one with a higher fee than the market-leading deal.

If you've a less than perfect credit score, you may also have to accept the fact that you may be given a low credit limit. For more on this, take a look at our article that explains what you should do if you're given a low credit limit on a balance transfer credit card.