Why are U.K. 0 percent balance transfer periods so long?

There are many credit cultural differences between the U.S. and other markets. But here’s one big one between the U.S. and the U.K.: 0 percent balance transfer periods are longer across the pond – way longer. 0% purchase credit cards

In August 2015, Virgin Money became the first bank to offer 40 months interest free for balance transfers, setting the latest bar for other issuers to meet (which they are continuing to do, as of January 2016). Meanwhile, the longest 0 percent balance transfer period available in the U.S. is 21 months, with most issuers falling between 12 and 18 months.

So why have U.K. BT periods ballooned to become as long as some personal loans? And how do issuers make any money if they’re allowing people to park their balances for more than three years? There’s been no official research done on the subject, so we asked three experts (located in the U.S. and in the U.K.) who know a lot about their countries’ card industries for their theories.

Why U.K. credit cards have such long balance transfer periods

The 40-month 0 percent BT period is only the latest move in balance transfer one-upmanship in the U.K. The chart below shows a steady climb that has more than doubled the length of 0 percent offers since 2009. Data in the chart was gleaned from press releases and news articles about new offers between October 2009 and January 2016.

UK longest balance transfer chart

At least eight or nine card providers are regularly in the fray, including Barclaycard, MBNA, Virgin Money, Halifax, Tesco Bank, Lloyds Bank and the Post Office, says Andrew Hagger, founder of U.K.-based personal finance commentary site MoneyComms. Historically, Barclaycard has made a strategy out of matching the BT period other issuers throw out, says Mark Scott, managing director of CompareandSave.com, a U.K. comparison site for financial products.

While there may be no definite, single factor driving U.K. 0 percent BT periods skyward and keeping those in the U.S. rather grounded, several factors may be at play:

  1. Competition

    Put simply, balance transfers is the competitive field on which U.K. issuers play, while, in the U.S. the playing field is rewards.

    The likely reason for that? Interchange fees (fees paid by merchants to issuing banks on every card transaction). The E.U. caps them for both credit and debit transactions. The U.S. does not cap them for credit, meaning U.S. credit cards can afford to fund – and compete on — elaborate rewards programs. You may remember how Chase and Discover went head to head late last year in offering double cash back on certain spending.

    As for the U.K., the cap puts competition based on rewards “out of the equation,” Scott says. Instead, U.K. cards compete on balance transfers. And the way consumers often compare offers is the length of the 0 percent period.

    “Balance transfers in the U.K. are the major marketing scheme for cards,” says Robert Hammer, CEO of R.K. Hammer, a U.S.-based bank card advisory firm with clients around the world. “Because it is such a major part of marketing there, it’s not surprising that there would certainly be more of it.”

  2. Regulation changes in the U.K.

    Before 2011, the Consumer Credit Regulations stipulated that issuers would give the illustrative advertised APR (called the “Typical APR”) to 66 percent of accepted applicants. After 2011, this legislation was replaced by the Consumer Credit EU Directive, which was meant to standardize the credit environment across the EU. “Typical APR” was replaced with “Representative APR,” and the 66 percent required-acceptance rate was replaced with 51 percent.

    In other words, issuers are now allowed to give their enticing advertised rates to a lower percentage of applicants, meaning they can feel more comfortable offering ever-better deals.

    “Issuers could restrict really good products,” Scott says. “All the big changes we’ve seen [in balance transfers], we’ve seen since then.”

    Based on Hagger’s calculations, the average duration is now 22.5 months (and the longest is 40 months). About four years ago, the average was 11.9 months (and the longest was 22 months).

  3. Less leniency

    Both Hagger and Scott point out that U.K. issuers are less lenient when it comes to mistakes. A single late payment can revoke your 0 percent rate and stick you with the go-to rate. In the U.S., meanwhile, late-payment penalties are set by the CARD Act. Issuers can’t raise rates on existing balances unless the promotional rate has expired, or you’re 60 days late. For example, see the terms on the Blue Cash cards form American Express (a CreditCardForum advertising partner):

    AmEx revoke promo apr

    In other words, it’s easier for U.K. issuers to end a cardholder’s 0 percent period earlier than expected – meaning they will make more money off you if you aren’t eligible for another card’s 0 percent deal.

  4. Higher go-to APRs
    When the balance transfer period finally does come to an end, you can expect your go-to APR to be higher in the U.K. than it would be in the United States. U.S. customers with good credit can expect an APR of around 13.9 percent (even lower on some cards) after the 0 percent period ends. U.K. consumers, meanwhile, can expect 18.9 percent minimum, Hammer says, a 43 percent increase.

    “So what I’ve surmised is that [U.K. issuers] have a lot more juice in the game,” Hammer says. “They’re getting a lot more returns from this particular scheme. Because of that, they’re willing to extend it for longer because they can financially.”

Whatever the mix of reasons at play, “there is an enormous appetite for balance transfers in the U.K.,” Hagger says. As consumer confidence and spending has grown in the U.K., “some people are financially disciplined and astute and regularly make use of this ultra-low-cost financing,” Hagger says. And then, of course, others are “financially treading water” and using lengthy balance transfer periods to delay paying off their debt.

Hagger points to British Bankers Association numbers which reveal 450,000 to 500,000 balance transfers have taken place monthly in the U.K. over the past year-and-a-half, totaling around £1 billion each month. Things heat up even more in the new year — January 2015, for example, saw nearly 600 balance transfers with a value of $1.34 billion, according to the BBA.

The BBA also estimates that only about 58 percent of the £63 billion owed on cards in the U.K. is bearing interest.

No organization collects equivalent statistics about U.S. balance transfer cards. But type in “balance transfer cards” into a U.S. search engine and then into a U.K. one; the U.K. results are filled with references to the all-out “balance transfer war” raging between issuers.

Balance transfer war leads to rapid evolution

The balance transfer war isn’t just driving longer balance transfer periods. It’s fueling diversity unlike anything we’ve seen in the U.S., when it comes to balance transfer offers.

In the U.S., balance-transfer cards are pretty standard – a certain amount of time with no interest and a 3 percent balance transfer fee (which is very rarely waived).

Meanwhile, in the U.K., “in the last 12 to 18 months, there has been a separate 0 percent balance transfer market developing,” Hagger says, with issuers offering lower balance transfer fees (often 1 percent or less) in exchange for shorter balance transfer periods.

“This battle has become so intense that now we have at least three credit card deals where you can get a 0 percent balance transfer of between 21 and 23 months, where there is no balance transfer fee at all,” says Hagger. “Totally free finance if you play it right.”

Scott has also noticed that the industry is moving toward “fragmentation” and “more rounded products.” It’s an industry joke that, someday, 0 percent BT periods will grow to be longer than mortgages, he says. But smart consumers who are serious about paying off debt know that an extra month at 0 percent is far less advantageous than a shorter 0 percent period with a waived balance transfer fee.

“Savvy consumers are looking for the right combination of things, instead of just going by the number of months,” Scott says.

And card-comparison websites are following suit, Scott points out, with customizable “smart rankings” of balance transfer cards that change with consumers’ needs, whether they’re looking for the longest 0 percent period possible, or no- or low-fee balance transfers.

How do banks make any money?

If U.K. consumers can expect such lucrative balance transfer offers (40 months interest free, waived fees), how are issuers making any money?

Issuers have done the math. While the intro rate on a card may be 0 percent and the go-to rate may be listed as 18.9 percent, those numbers are “meaningless” when it comes to calculating how much a bank is making off a card, according to Hammer. A consumer who stretches out repayment after the 0 percent deal expires (or uses the card for ongoing purchases) will end up paying a much larger percentage of the original balance in the long run. Hammer calls this percentage that the consumer actually pays the “effective” APR.

“These [effective] rates can be up in the mid-double digits,” he says. “So why would we not be surprised that they’re extending periods to attract customers?”

And remember — banks don’t have to give their best terms to all applicants. Scott showed us the fine print on two popular U.K. balance transfer products. While the best customers will get the advertised 37 months or 40 months at 0 percent, others could get just 18 or 20. And the post-intro APR? That could be as high as 29 percent on one product and 27.9 percent on the other. So, if you have poor credit, the bank will make you worth its while via higher costs.

“If you’re an ‘excellent’ customer, you can access better deals than ever before,” Scott says. “But those no longer considered prime can now expect to be penalized more than ever.”

Attracting customers with long 0 percent periods has another advantage for banks. U.K. consumers in general, Scott says, are hesitant to switch banks. However, he says, “it’s relatively easy to convert people with credit cards.”

Once a consumer has switched his or her balance over (enticed by a compelling BT offer, of course), it’s the first step in a potentially lucrative relationship for the bank that could eventually include other types of accounts, more cards and loans.

“You bring them over with a balance transfer and then they’re in the door,” Scott says. “Balance transfer cards are like gateway products.”

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