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Sweet credit card deals can sour after rate rise hits hard

CREDIT card providers are deploying ever longer interest-free offers in the battle to win new custom.

For many people who have built up debt over the summer holidays, these will look very appealing - but they may not be the bargain they seem.

The AA, Bank of Scotland and Lloyds Bank have all recently launched cards charging no interest on transferred balances for up to 28 months from the date of account opening.

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The AA card also allows holders to transfer debt, such as store card balances or overdrafts from their current account, to zero interest for the same period.

Mark Huggins, managing director of AA Financial Services, said the card was "the best we've launched for consolidating other more expensive debts or card balances".

The Bank of Scotland and Lloyds 28/12 card offers the additional sweetener of 12 months' interest free on new purchases.

And it is possible to get an even longer interest-free period. Bank of Scotland and Lloyds have platinum cards offering 32 months on transfers and no interest on purchases for the first six months.

Other providers, such as Barclaycard, Halifax, Tesco and Sainsbury's, give between 30 and 33 months interest free.

The interest that can be saved by transferring existing debt can be substantial. Bank of Scotland calculates that someone moving £2,000 from a card charging 17.9 per cent annual interest to its 28/12 card could be more than £650 better off over 28 months.

Someone making £2,000 worth of new purchases on the day the 28/12 card was issued, instead of putting them on one charging 17.9 per cent, would save more than £300 over 12 months.

But deals like these come at a cost. Providers typically charge around 3 per cent of the amount transferred. AA's handling fee is 2.9 per cent of any card debt moved and 4 per cent of current account debt, with a £3 minimum for both. The 28/12 card charges a lower than average initial fee of 1.5 per cent, while Bank of Scotland and Lloyds's initial fee on the 32-month card is 3.5 per cent.

Alan Brindley, director of credit card channels at Bank of Scotland and Lloyds, said: "By adding two substantial interest-free periods, we hope the 28/12 credit card will be best value for many customers' circumstances."

But only those with the best credit histories are likely to be accepted for a balance transfer card, and switches must normally be made within a period of 60 or 90 days to qualify.

If you fail to make the monthly minimum payment on time on any of these cards, as well as facing a late fee, the interest-free deal will be withdrawn and you will be charged the long-term rate until the debt is cleared. Full interest will also be applied indefinitely if you exceed your credit limit.

Once the 0 per cent period ends, the rate on any outstanding debt, and on new transfers and purchases, will rise dramatically.

The AA quotes a representative long-term annual rate of 18.9 per cent, while Bank of Scotland and Lloyds say at least 51 per cent of those accepted for 28/12 will also get a rate of 18.9p per cent, while the rest will pay 21.9 per cent or 25.9 per cent.

Card providers are legally obliged to give a representative rate to only two-thirds of successful applicants. The other third - whose credit records are good but not perfect - can be charged more.

Although most people who apply for balance transfer deals have every intention of clearing the debt within the free period, the reality is that many don't - and end up paying hundreds, or even thousands, of pounds more interest than they budgeted for.

The Royal Bank, which no longer offers 0 per cent cards, says nearly two-thirds of those starting out on one of these deals go onto their provider's long-term rate, and a third are still paying off their debt six months after the promotional period has ended.

Meanwhile, four out of 10 owe more at the end of the interest-free deal than at the beginning, with some discovering they can't get another 0 per cent card and struggling to afford their repayments.

Paul Riley, Royal Bank's head of credit cards, cautioned: "The credit card market is dominated by 0 per cent balance transfer cards. We know that the majority of customers who take these cards are taken by surprise when their rate rises dramatically and they are charged high rates for months.

"We're just not going to do that any more; it doesn't help people manage their money effectively."

To avoid paying unnecessary interest, it you aren't going to clear your debt by the end of the 0 per cent period, switch to another interest-free deal - if you can get one - or consider moving to a card that offers a permanently low rate.

The Royal's Clear Rate Platinum Card charges 6.9 per cent representative on transfers and, if no transfer is made, on purchases. Once a transfer has been made, the purchase rate rises to 11.1 per cent representative. There is a £24 annual charge but no handling fee.

Other providers, including MBNA, Tesco, Sainsbury's, the Co-op and NatWest, also have cards charging representative rates of between 6 per cent and 11 per cent long term.

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