Martin Lewis has issued a warning to people with credit card debt, urging them to "act sooner" ahead of the Bank of England's next interest rate announcement on November 5. Speaking on his BBC podcast, the money-saving expert said the announcement could have "subtle" but significant ramifications for those looking to manage their debt through balance transfers.
A balance transfer involves using one card to pay off other credit or store cards, so the debt moves to the new card at a far lower rate, often 0%, making it easier to become debt-free as repayments cover debt rather than interest, according to Moneysavingexpert. However, the interest-free period typically lasts for a set time, ranging from a few months to up to three years, and often carries a one-off fee.
Rising Rates and Debt Burden
With inflation climbing, interest rates are expected to rise, which could affect people using balance transfers to clear their debt. Polling from StepChange Debt Charity reveals that almost one in six (15%) of adults, equivalent to more than 8 million people, find keeping up with their credit card repayments a very or fairly large burden each month.
Lewis said: "This is a warning for anyone who has existing debt on credit or store cards. I'm concerned the deals you can get to cut the cost are about to get worse so acting sooner is safer. I'm talking specifically about balance transfers - that's when you get a new card that pays off debts on your existing card for you so you owe the new card instead but at 0% interest.
"Now, we're in an upward rate environment. The predictions are that the Bank of England is going to put up UK base rates and, when that happens, the changes to credit card 0% deals are subtle. The 0% length may shorten, the one-off fee you're charged to do a balance transfer may increase, and the go-to APR - the rate you're charged once the 0% ends may also increase.
"But I suspect the most likely change, and the most difficult to spot, is that fewer people will be accepted for the best deals. They're going to tighten their eligibility criteria, so they might still advertise a three-year balance transfer 0% interest-free - it sounds great, they're available at the moment. But suddenly, when you apply, because it's an up-to rate, not as many people are going to get three years. Some will get two, some will get one. So, you need to get your skates on."
How Balance Transfers Work
Once people have a balance transfer card, they can move debt onto it from one or more existing cards, usually online or over the phone. They need to tell their new lender how much they want to transfer and provide the account numbers of their old cards. A fee is charged for each balance transfer, which is added to the amount owed on the card. This fee tends to be around 2-4% of the transferred amount, so moving a balance of £5,000 could cost approximately £100-£200.
Balance transfers offer several benefits but are not suitable for everyone, and people should consider their individual situation before proceeding.
Inflation and Rate Hike Expectations
A major driver of higher inflation last month was motor fuel prices, which rose by 30% in the year to September. Petrol and diesel prices have surged since the start of the US-Israeli war with Iran, which has squeezed global oil and gas supplies and driven up wholesale prices. Living costs are expected to rise further as households face higher energy bills this winter.
Martin Sartorius, lead economist for the Confederation of British Industry, said September's inflation rise means an interest rate hike was "firmly on the table" at the Bank's next meeting in November. He said the rate-setting committee will likely want to "guard against the risk of persistently higher headline inflation becoming embedded in future wage and price-setting behaviour".
