What is a balance transfer?
Despite the “credit crunch” that we have heard so much about in recent months, low rates of interest can still be available to the UK consumer. Many credit card providers seek to attract new customers with introductory offers of low rates of interest – These rates can even be zero. For a small percentage fee you could transfer your Credit Card Debt with a high rate to a new account with perhaps a zero rate which can be held in some case for up to fifteen months.
As a short term solution it can be a way of helping ease the pressure of debts and allow a window of opportunity to obtain funds to pay off the debts perhaps by selling assets, obtaining new employment or downsizing your property.
Key things to watch out for if you are considering a balance transfer:
New card spending
Don’t be tempted to spend on the new card – Any new amounts you put on to the account won’t benefit from the introductory offer and typically will be the last amounts to be paid off. One simple tip would be to leave the card at home when you go out to reduce the temptation to spend on it. That said read the small print as some have a ‘no-spending’ clause which would result in the removal of the introductory rate if you don’t spend a certain amount within a certain time period.
Normal Interest Rate
Remember though that once the introductory period expires then the interest rate will revert to the card’s normal rate. Care should be taken to ensure that if you are not going to pay off the debts in full then the normal rate would still be better than your original provider. Alternatively you could of course consider jumping again to another introductory offer.
Card providers may bemoan customer disloyalty displayed by certain people who become “Rate Tarts” but they all offer the same type of deals and benefit from the transfer fees which can be up to 3%. There are providers who offer no-fee transfers so it does pay to shop around but remember it is only the interest that is frozen and that you will still have to make monthly payments in accordance with the terms and conditions.
Some cards have annual fees which may be added to your balance and depending on payment hierarchy you could be charged interest on the fee.
Impact on credit rating
Credit agencies will monitor how many cards you have and what is outstanding on your cards so it can impact your credit rating. You could also be refused more credit it you have too much outstanding or given a lower credit rating. If you are concerned about your rating you should find out how much credit a new provider will give you. It is very important to close your old credit card account.
Old card spending
Don’t be tempted to spend on the old card either – You run the risk of racking up the same level of debts again. Once you have transferred the debt, cut up the card and close the account.
Interest free term
Some credit card providers are offering for an interest free term of a year or more but tend to make up for this by charging a transfer fee.
Paying off the debt
It is important to pay off as much as you can as you go along so that you become debt free as soon as possible. If you just make the minimum monthly repayments it will take too long to clear the debt in full and you run the risk of incurring costs when the introductory period runs out.
If you are looking to transfer a balance as a way of improving your finances don’t be swayed by other perks offered by the credit card providers such as cash-back bonuses, air miles, insurance or how cool/cute the card looks. Stay focused on what is important and that is the cost.
Theoretically you can transfer balances from card to card to card for many years, particularly if you always make your payments on time and your credit rating is high enough. What should be avoided is getting on to a balance transfer merry-go-round where you transfer the same balance repeatedly without ever paying it off in full. The result of this is that you incur transfer fees time and again. Worse still you also run the risk that you slip off on the debt merry-go-round, where you transfer a balance, don’t close your old account, incur further debt and though you may have saved on some interest rate costs, your debt problem has doubled.
As mentioned before balance transfers can be a useful tool in addressing your debt problems but they are only a short term measure. If you have debt worries, you may benefit from speaking to a professional on a free and confidential basis.