The dangers of balance transfers

Transferring £6,500 worth of expensive credit card debt to a new provider offering a 0% interest rate makes sense, doesn't it? It would seem that by slashing the interest you pay on your debts there's nothing to lose.

However, for one particular police officer this so-called money saving trick ended up costing him rather a lot and he saw £1800 in penalties and interest stacked onto his mounting credit card bill.

So what went wrong?

With the knowledge that he had been accepted for the new credit card deal, the officer planned his finances down to the last penny, or so he thought.

Needing cash, he withdrew £10 per day for the three days leading up to pay day, expecting to incur a cash withdrawal fee of £2 each time. What the officer didn't realise though was that the fee was £3 and not £2 which subsequently made him exceed his credit limit by a paltry £3.

The deal breaker

Because he was now overdrawn, the 0% deal was terminated and he was also hit with a £12 over- the- limit charge plus interest of £140. On top of this his credit file was marked down and he was tied into a 15-month term, no longer at 0% but instead at a whopping 17%.

Why you must make that first payment on the balance transfer deal

Going over your limit is one deal breaker; another is to miss that first payment. Therefore you must set up a direct debit with the credit card company to pay at least the minimum amount in time to make your first payment.

If they delay it, and it is in their interest to do so, and it does not get paid then you will be charged the £12 fee for late payment as well as the balance transfer fee - 3% on £6,000 = £180! You could also find that the special introductory offer is withdrawn, as happened to the police officer in this case.

Not all credit card companies operate in this way but a number of my clients have been caught out by this practice, having to pay interest on the balance before they can arrange another card provider.

A simple way to avoid this happening and for peace of mind is to consider making the first payment manually, in plenty of time. So, make a note of when the introductory offer ends as missing this date could be costly!

The balance transfer fee

This can be anything between 2% and 5% and is often called an 'admin fee'. It can be quite expensive if you have only a small balance which you intend to clear quickly, in which case you could consider going for a 'short term no balance transfer fee' deal.

For large amounts it is important to have a long period on the 0% rate when the balance transfer fee becomes less significant.

The holiday/foreign transaction

By using the wrong card you can be charged between 2.75% and 2.9% on every transaction made abroad and in some cases incur an additional cash withdrawal fee which could total 5.75% or more. Last year the banks earned more than £630 million in foreign transactions alone. No wonder credit card providers view these dealings with glee!

Will a 0% credit card balance transfer solve my debt problems?

Heed this warning. Once you move balances from an old credit card lender to a new credit card provider then the new lender may not support you in any later debt resolution, for example an Individual Voluntary Arrangement, (IVA) or Debt Management Plan, (DMP).

The reason is simple. Because they have only just advanced the money, as a new lender they require payment as per their agreed terms. Had you sought advice about your debts before moving to the new 0% balance transfer deal then the chances of the credit card company supporting any debt issues would be greater.

If a 0% transfer deal is properly thought through and properly managed, fine, but without knowing the full picture it is irresponsible for anyone to simply say that moving your credit card balance to a 0% lender will solve your debt problems. You have been warned!

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