How to be a hero on zero interest cards

The Capital One launch of the first 0 per cent interest rate introductory offer on its credit card two years ago, took the established vogue for low initial rates to its extreme. Since then, it has been joined by more than two dozen competitors, all offering variations on the 0 per cent theme. They have been enthusiastically received by UK consumers, by far Europe's biggest users of credit cards.

Clearly, offering free credit for a period – typically five or six months, though rising recently to nine months – is an effective way for card companies to pull in new business. The chances are that anyone who takes the trouble to pick out a card on which unpaid debts travel free for a while is going to make use of that facility, either by transferring debts from other cards or by spending significantly on the new card itself.

But at the end of the introductory period, inertia generally rules the day. Most cardholders continue to use that card rather than switching to another 0 per cent offer. Many, inevitably, will not have cleared their outstanding balance when the standard rate kicks in, and many more will maintain an ongoing debt from month to month. That is what credit card companies like to see.

For consumers, the 0 per cent interest phenomenon represents a great opportunity, and a real risk. If you are disciplined, you can use your free-credit period constructively. Different strategies work in different situations, but the key in each case is to make a plan and stick to it, rather than using your card in an ad hoc fashion. And there are no rate reductions on cash withdrawals. Some people switch to a 0 per cent rate specifically to make a large purchase such as a car or furniture, and use their months of grace to clear the debt in full or part. The really canny ones may switch cards more than once to spread the repayment over a longer period without charge.

Alternatively, it is possible to consolidate a clutch of messy store card and credit card debts on a single piece of plastic and pay them off at no charge. That was the plan adopted by Kevin Carr, who works for IFA Lifesearch. He went for an Egg card, transferring several thousand pounds of store and credit card debt to it. "I won't pay off all the debts," he says. "I would consider switching again at the end of the interest-free period, but so far Egg has made it so simple I might stay there."

Another useful option, if you are temporarily out of pocket, is to transfer or run up an interest-free debt, then simply postpone the bulk of the repayment until you are back in the money. You will still have to make minimum repayments, typically the greater of 3 per cent or £5. This plan could be handy, for instance, if you are expecting an annual bonus payment at Christmas but do not want to wait that long before you go shopping, or if you are self-employed with an erratic income flow.

John Mcleod, a freelance IT consultant and DJ enthusiast in south London, is not working. He does not normally run up ongoing debts on his credit cards, but in this case he has used his 0 per cent deal, again with Egg, to finance the purchase of £1,000 of DJ equipment, hoping he will get some gigs while he has no other work. "I've bought decks and a mixer, and I may well buy more items on the card," he says. "I am making the minimum payment until 1 July, when the 0 per cent deal runs out, but I hope to be back in work then and able to pay off the balance."

But any arrangement which makes it easy for spendthrifts to splash out and pay later at no extra cost is potentially dangerous. The Credit Card Research Group (CCRG) acknowledges that 0 per cent credit cards have "undoubtedly fuelled the recent growth in consumer debt", which now stands at more than £3,500 per household in the UK, show DTI figures. But CCRG says: "It's difficult to identify exactly how much influence 0 per cent interest offers have, because many credit card holders do benefit regularly from free credit simply by clearing their debt in full each month."

If you do not have a clear strategy, it is easy to let your bills build up, paying just the minimum each month. Before you know it, the no-interest period is over and your now-sizeable debt has been catapulted onto a hefty standard rate. Richard Holmes, at Capital One, says: "When you choose a 0 per cent deal, the really important rate to look at is the 'go-to' rate, the rate you'll pay after the introductory offer has ended."

Capital One used revolutionary analytical technology to become one of the world's leading card issuers. But that status took a knock last year when US regulators insisted the company set aside more money to provide for potential bad debts by customers. And this month its chief financial officer, David Willey, resigned over an insider share-dealing investigation.

A quick look through the go-to rates from the Moneyfacts agency shows you could pay as much as 17.9 per cent APR after the first five months on cards from Halifax, Bank of Scotland or Birmingham Midshires, all part of the HBOS group. A more competitive rate comes from Egg and Nationwide, who charge 13.9 per cent APR, but only Halifax's H2X card combines a go-to rate of less than 10 per cent with a five-month interest-free period.

Disregard the temporary attractions of a 0 per cent introductory offer and it is possible to find even cheaper standard rates. Cahoot is charging just 7 per cent on its card, and Intelligent Finance 8.9 per cent.

But some deals are not what they seem. What looks like a relatively long, interest-free period can magically shrink. Tesco is offering 0 per cent interest until 1 October, but it depends on how quickly your application is processed. Typically, you will be quoted a processing time of two to three weeks, but if the process does not go smoothly it could be more like two months, with the clock ticking on your interest-free period. Yet a six-month introductory deal will run from the date of issue, regardless of how long the application takes.

If you want to consolidate existing debts from other cards, make sure you choose a provider that extends the 0 per cent interest deal to debt transfers. Leeds & Holbeck Building Society and Capital One are among those who do not. Some, such as First Direct, allow an interest-free period for credit transfers but charge standard rate interest on purchases during that time. The present longest interest-free period is nine months on the PC World Marbles card, and it covers purchases and debt transfers.