It’s been a busy news week, yet one story stood out as the proverbial “marmalade dropper”. John Lewis has issued a profit warning.
Long considered to be the unassailable middle-class bastion of the high street, the mighty department store is not immune from the chill winds howling through the retail sector.
This was all the more shocking, as I have personally spent several thousand pounds there in the past six weeks doing up our kitchen. We have been saving up for this project, but I have paid for the bigger ticket items on our credit card to benefit from the greater consumer protection this offers.
As I sat in the gleaming new kitchen and opened this month’s credit card bill, it was of conserve-dropping proportions. I had the money in our savings account — but decided to do a quick online search first.
It turned out that if I transferred the balance to a Santander Everyday Credit Card, I would pay 0 per cent interest for a guaranteed 27 months. Typically, lenders will charge a fee of about 2-3 per cent of the balance to do so. But competition in the market is so hot that Santander is offering a fee-free zero interest deal.
This would mean we could keep the money in our savings account (where we are getting around 2.5 per cent interest) and steadily repay what we owe over two years for no extra cost. It’s a very tempting offer — but what could possibly be in it for Santander?
Obtaining credit is easy. Clearing the debt is much harder
That all depends on how disciplined you are about paying the money back. Divide the balance by 27 and set up a direct debit for that amount, then cut the card in half and never spend another penny on it — and it really will cost nothing.
However, new purchases will attract interest of 18.9 per cent (after the introductory rate ends). If you are tempted to spend more — and there is an array of linked cashback deals and retailer offers — the costs will soon rack up if you don’t pay the debt down the following month.
If you slip up and miss a payment, the 0 per cent interest will abruptly end. And if you fail to clear the balance within 27 months, you’ll be clobbered with the higher rate of interest unless you manage to switch again.
Obtaining credit is easy. Clearing the debt is much harder. As an expert on the BBC1 programme Right on the Money, I was casting a close eye over the finances of a nurse called Claire who was very worried about her debts. In the episode, which airs next Wednesday, she admitted she was too scared to add up her total debts.
These had grown, little by little, over the course of several years. But the mounting costs of servicing these debts was making it impossible for her to find any spare cash to reduce her borrowings.
As a homeowner with a full-time job, it had been easy for Claire to obtain credit.
She transferred a large credit card debt to a 0 per cent card, but kept the old card. That provider wrote to her offering to increase her credit limit. Soon, she had built up a balance on that too — and was being charged a high rate of interest.
She had a shiny new car, leased via a PCP deal (personal contract plan) which was costing her hundreds of pounds a month — yet would never be hers unless she stumped up an expensive “balloon payment” at the end of the term.
Her sofa had been bought on a finance deal which offered easy monthly payments, yet charged around 10 per cent interest. She was also offered finance by her vet when one of her beloved dogs became ill. The interest rate was more than 9 per cent.
The cost of servicing all of these debts caused her to run up a huge overdraft, which I calculated was costing her about £250 in bank fees per year.
This week, the City watchdog declared that there was “no such thing as free banking” claiming that nearly one-third of profits on current accounts come from overdraft fees and charges paid by just 10 per cent of customers.
The Financial Conduct Authority said that Britain’s biggest banks benefited from a “captive audience” of customers who were reluctant to switch and could be cross-sold other products, often at worse rates than they could get elsewhere.
You could apply the same logic to the lure of zero per cent credit card deals. Some borrowers might have the discipline to repay the money without incurring so much as a penny in interest, but they will be subsidised by the majority who pay fees or interest charges at some point down the line.
The same goes for energy bills — those who switch and keep switching, will pay less than those who don’t.
We will have to wait a bit longer to hear FCA’s proposed overdraft reforms, but the fundamental unfairness with all of these systems is that the customers who end up paying the most tend to be the ones who have the least.
Claire had passed a credit check for all of her borrowings. Psychologically, this gave her a false assurance that she would somehow be able to afford the repayments. Her overdraft acted as a “buffer zone” and expanded to cover the gap between income and expenditure. When it surpassed a certain level, she eventually had a phone call from her bank which spurred her to face up to her financial situation. Hopefully her story will help others in a similar situation.
Could things have been different if her bank had nudged her at a much earlier stage? Charges on overdrafts are often presented in terms of “pence per day”, which makes them seem small and insignificant — but, clearly, they are very profitable. If you love shopping, special offers on credit cards sound tempting, but any “savings” could be dwarfed by the interest you pay.
The world is full of banks and finance companies waiting for us to say “yes”, but easy credit can quickly become much more complicated.
Claer Barrett is the editor of FT Money: firstname.lastname@example.org; Twitter: @Claerb
Date published: 29 June 2018
Word count: 1046
Copyright The Financial Times Limited 2018
© 2018 The Financial Times Ltd. All rights reserved. Please do not copy and paste FT articles and redistribute by email or post to the web.