’0%’ balance transfers misleading consumers

As part of our Stop Sneaky Fees and Charges campaign, we’re calling on the Financial Conduct Authority (FCA) to take a closer look at balance transfer deals, after finding consumers are often misled by ‘0%’ offers and only one in 20 understand the true cost.

We estimate that consumers pay around £334 million in balance transfer fees each year but, when we asked people who have a credit card to work out how much a balance transfer would cost, only 4% got it right. Seven in ten (68%) wrongly thought the transfer was completely free, even though we showed them the fee.

We also asked people to compare five credit card deals and to pick the cheapest for someone who wanted to make a balance transfer but who would not use the card for spending. Only a third (34%) chose the correct card, while another third (35%) wrongly picked the one with the lowest APR, which had a higher balance transfer fee and would have cost over three times as much (£123.02 compared to £33).

One in five (21%) people who took out a new credit card in the last two years did so to make a balance transfer, so it’s worrying that so many find it difficult to work out the cost of these deals, as it could mean they end up paying far more than expected.

We’ve submitted our evidence to the FCA and want the regulator to look at balance transfer fees as part of its investigation into the credit card market to stop people being misled, and help them pick the best card for their needs.

We want the FCA to take action to ensure consumers understand these fees, including looking at whether the fee should be shown as a monetary sum rather than a percentage, or even consider banning firms from advertising deals as ‘0%’ when there is a fee. 

Our ‘Stop Sneaky Fees and Charges’ campaign is calling on financial companies to put an end to fees across the financial sector that are hidden, excessive or make the total cost difficult to understand and compare.

Which? executive director, Richard Lloyd, said:

“Too many credit card deals appear to include sneaky fees designed to catch customers out. With millions now using credit cards to pay for essentials, it’s vital that the Financial Conduct Authority takes action to ensure consumers are well protected. We want the regulator to scrutinise balance transfer deals and make it easier for people to understand their true cost.”

Which? has some top tips to help you decide which credit card is right for you:

  1. Understand what you need the card for. Credit cards can help you manage your finances in a number of ways, depending on what type of card you choose. Think about whether you just want to use your card to repay existing debt or if you want to use it to make purchases.
  2. Check your credit rating. If you have a poor or limited credit history, there are certain credit cards that are designed specifically to build your credit rating. These are likely to have lower credit limits and higher interest rates, but can improve your chance of accessing better deals in future.
  3. Check what interest you’re currently paying on existing cards. Moving existing debt to a 0% balance transfer card can help you reduce the cost of borrowing. Be sure to check the fee before you sign up and make sure you pay off the balance before the deal ends.
  4. Consider whether you can pay off your credit card bill in full every month. A 0% purchases credit card will allow you to pay off your bill over a certain period without being charged interest if you can’t afford to pay it off immediately, but if you don’t need a card for borrowing look for one that rewards you for spending.

We also have a free, online calculator to help you work out when you’re likely to pay off your credit card bill, based on your current repayments.

Notes to editors:

  1. Which? Credit Card Choice Survey: Populus, on behalf of Which?, interviewed a representative sample of 2,026 GB adults online between 6th and 8th March 2015. Data were weighted to be demographically representative of all GB adults.
    To calculate the cost of a balance transfer deal we told consumers to assume a debt of £2,400 is placed on a card with a balance transfer deal length of 25 months and that the debt will be paid off in 24 months – so within the deal period. There was a balance transfer fee of 1%, so it would cost £24, which was chosen to make the calculation as simple as possible for people. They were told to assume that no extra spending would be made on the card.
    To see if people could identify the cheapest card for a balance transfer deal, we gave people a scenario of someone looking to take out a new credit card who has £2,200 in debt on two cards that are charging him interest. They are therefore looking for a card to make it cheaper to repay the debt and plan to repay debt in full over the next 18 months and not use the card for spending. We asked people to identify the best card from five options, showing information on: the length of the 0% balance transfer deal, the balance transfer rate after the deal period, the balance transfer fee, the length of the 0% purchases deal, the purchase interest rate after the deal period, the representative APR, and cashback rate for spending. For data quality purposes, only respondents who successfully answered a preliminary question were included in the results.
  1. Which? calculation based on data from Moneyfacts (23/03/15) and BBA (2015) High Street Banking, March.
  2. Over 91,000 people have supported our campaign calling on companies to take action and:
  • Don’t hide the full cost from customers: Fees that are part of the total cost of a product should be prominently and clearly displayed.
  • Stop making it hard to compare prices: It should be easy to work out the best deal, taking all fees and charges into account.
  • Stop stinging customers with rip off additional charges: Extra compulsory fees after you’ve purchased a product should be cost-reflective.

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