Ditch your debt with a balance transfer card
Spending on credit cards has become more and more common and 64% of UK adults now have at least one credit card, according to the UK Payments Administration. But there are good and bad ways to use this borrowing facility.
One of the best ways to avoid unnecessary charges after racking up debt is by using a credit card with a 0% balance transfer period. There are now nearly twice as many credit cards offering 0% balance transfer deals compared to five years ago.
But how do these cards work, and what should you watch out for?
What is a 0% balance transfer card?
If you have built up debt on a credit card that is charging you interest it's possible to transfer this money onto a 0% balance transfer card.
This would charge you 0% interest on the balance (but not on new spending unless it's a 0% purchase card) for a set period of time. This means that every little bit you pay off would go towards repaying the initial debt instead of being eaten up by interest charges.
How long are most 0% balance transfer periods?
There are an increasing number of lengthy 0% balance transfer deals on the market. They typically last for between 14 and 20 months but the best one is currently offered by Barclaycard for 21 months.
How do I qualify for one?
The best deals are for new customers and especially those with a good credit rating. Many card providers will automatically reject you if you already have one of its products, or if you have had one in the past 12 to 18 months.
Before applying, make sure you are confident you will be eligible by checking your credit record with a company such as Experian.
When you apply for a credit card the provider will check your record - but doing this will leave what is known as a 'footprint' on your record. Too many footprints can have a negative impact on your credit score, and might damage your chances of being approved for a mortgage, loan or credit card down the line.
What are the costs involved?
You will have to pay a fee to transfer money from an existing credit card, usually around 3%. Some providers also have a minimum amount you must transfer. When choosing a card, work out if the fee is worth paying in relation to the amount of interest you're already paying.
Can I use the balance transfer card for more shopping?
Not all 0% balance transfer credit cards are interest-free for purchases as well. If you intend to use your card for further shopping (instead of just repaying the debt), opt for a card that offers 0% on balance transfers as well as on purchases.
What should I watch out for?
When the introductory period ends you may be hit with higher-than-average interest rates so try and pay off your debt before the period ends. If this is not possible, check whether you can move the debt over to another 0% balance transfer card.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.