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 You could also find that the special introductory offer is withdrawn, as happened to the police officer in this case.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!
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
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.