Interest free periods at all time high: five major risks

Interest-free periods on credit card purchases have never been so long. Over the past three years these periods have risen an incredible 69%, so that the market-leading card now offers 27 months interest-free.

Research from GoCompare highlighted that back in 2012, the longest introductory period on the market was 16 months. Since then, the periods haven't just grown - that growth has accelerated. Last year the length of introductory rates was up 7 months - compared to a rise of just 2 months a year earlier.

Matt Sanders, Gocompare.com's credit card spokesperson, commented: "As credit card companies compete for customers, offering a longer 0% introductory period has become the go-to way of attracting consumers. The appeal is clear - a longer period of 0% is attractive way to spread the cost of a larger purchase for longer."

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The risks

It certainly sounds like good news, but there are five reasons why this kind of card might be very bad indeed for your wealth.
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1. The right way to use one of these cards is to use it to spread the cost of a one-off payment, and then divide the repayments to clear the debt by the end of the period. If this is how you use it, it's a fantastic tool.

However, thousands of people set out with every intention of doing this, and then cannot pay the debt back within the interest free period - however long it is.

Sometimes they are tempted into making more purchases as they go along - promising themselves they will somehow pay it all off in time.

In other cases, people find their circumstances change over long repayment periods like this, so they can no longer afford to make the payments.

2. If you don't pay off your purchases in time, the rate will rise. Sanders warns: "Once the introductory offer expires any remaining debt on the card will be subject to the standard rate on the card, which could be 18.9% APR (variable) or higher".

You can, in theory, switch it to a card offering 0% on balance transfers, but there may be fees involved and there are no guarantees you will be accepted.

If you no longer qualify for an interest-free deal, or these deals are thin on the ground by then, you may not be able to switch the balance somewhere interest-free, so the interest charges will soon start to mount.

3. Logically it may seem like a good idea to stretch borrowing for as long as possible - to keep the monthly cost down - but the longer you take to repay, the more risk that you'll need to borrow again while you still have these debts around your neck.

Let's assume, for example, that you borrow to spread the cost of Christmas. If you had a deal for 9 months, you'd have it paid off by next September, leaving you a couple of months to save towards next Christmas. If you borrow for 27 months, you're going to be carrying these debts through two more Christmases - during which you may pick up the same debts again - twice over.

4. There's also a psychological problem with this kind of deal. The satisfaction of the purchase and the pain of payment are separated by more than two years, so until you get to the point of paying, it's hard to feel the downsides of making lots of expensive purchases.

There's a real risk with very long deals that we have far too long before the pain kicks in - during which time we may be tempted to splash out more and enjoy what seems at the time to be consequence-free satisfaction.

5. Finally, there's the risk that you are attracted by this deal, apply for it, and fail to get it - making it more difficult for you to get any other card.

A new study by ClearScore found that one in three people think their credit score is much better than it actually is. On average they over-estimated by around 200 points - which is the difference between the kind of excellent credit score that would get you an interest-free deal with no problems, and the kind of disappointing scores that mean you don't stand a chance.

Justin Basini, founder and CEO, ClearScore, said, "People have a natural tendency to inflate their creditworthiness, but the data suggest that around a third of people make wildly inaccurate overestimates. This false confidence matters - blindly applying for credit can make you even more unlikely to be accepted in future because failed applications can damage your credit rating. This leaves people vulnerable to becoming trapped in a spiral of debt."

In an ideal world, therefore, longer interest-free periods offer great opportunities for people to borrow without ever paying interest. In the real world, it may mean they borrow more, build up debts, and end up paying a fortune on an expensive deal as a result.

But what do you think? Will you be taking advantage of these cards, and do the risks concern you? Let us know in the comments.