The dangers of zero per cent borrowing

The zero per cent credit card would seem a great way to clear debts because everything you pay off goes directly towards reducing your arrears — the bank earns no interest.

However, about a third of the borrowers who took out such a card since 2010 ended up with higher debts. Some 42 per cent of borrowing is now on such cards, compared with 34 per cent three years ago.

Research from the Fairbanking Foundation, a not-for-profit organisation, shows that 41 per cent of the people who opted for zero per cent cards for purchases failed to clear all their debt, while 45 per cent who transferred debt could not clear it.

About 28 per cent blamed their bank for the fact that they were now in more debt, saying that long interest-free periods “encouraged” it. Just over a quarter said their credit card offered them access to new interest-free credit, which they used, and 22 per cent said the long period without interest meant that they were not focused on repaying their debt.

You can get cards with a zero rate on purchases or balances transferred from other cards, with the interest-free period applying for years. Most big banks offer them but Capital One has pulled out of the market. Richard Rolls, of Capital One, says: “Too many credit card customers end up worse off as a result of taking up such an offer.”

Antony Elliott, the chief executive of the Fairbanking Foundation, says: “Used sensibly, zero per cent deals can be useful but it is clear they are also encouraging significant numbers of people to take on more debt and can be detrimental to helping people manage their finances.”

Several zero per cent cards now offer interest-free payments for more than three years. Barclaycard offers 37 months at 0 per cent for balance transfers (with a 2.55 per cent fee), while Post Office Money has launched a new Matched Credit Card, giving spenders a market leading 27 months of interest-free purchases.

Free and impartial advice on money issues, including credit cards, is available from the website moneyadviceservice.org.uk. People with debt problems can get free advice from Step Change, the charity, at stepchange.org or by calling 0800 1381111.