The rise of the credit card loan

The credit card has seen many changes in recent times, ranging from superficial alterations such as shape and imagery to more important transformations such as Chip and PIN. However, a quieter credit card revolution is taking place, and it might be the most profound change of them all.

Over the past 10 years, the credit card industry has undergone a surge in demand for cards with low-rate balance transfers.

Steve Willey, head of credit cards at price comparison site moneysupermarket.com, said: "Cards were once regarded as your flexible friend to enable short-term borrowing as a buy now, pay later option for purchases. However approximately 35 per cent of credit cards issued are taken for borrowing, which normally extends way over the initial zero per cent balance transfer period. As such, they are viewed as low-rate pseudo loans.

"The credit card market is becoming increasingly segmented. There are still the traditional users who use their cards to make purchases they pay off each month, but for the one in three people using their cards as pseudo loans, most are saving money over traditional personal loans."

For example, a £3,500 personal loan at 8.1 per cent over two years will cost £292 in interest, whereas taking advantage of 12-month zero per cent credit card balance transfers with a 2.5 per cent fee in successive years will incur £130 in fees – a saving of £162.

Steve Willey added: "The change has been brought about by the industry creating cards that can also perform as a loan. People who want to borrow a small amount for a short period are increasingly using a credit card to do so because it so much cheaper than taking out a loan.

"As long as the consumer is disciplined in not adding purchases to the existing balance transfer, they will finish in front. But beware, this only works if you follow the golden rules of making at least the minimum monthly repayment on time and not spending on the card.

"The next significant change for the industry will be the way we pay for everyday items with Visa 'Paywave' and MasterCard 'Paypass' coming to the fore. Innovation in the industry is invariably driven by customer demand, improving security and processing payments quicker."