Hefty charges for missed payment
Moneysupermarket.com found that missing or being late with just one credit card payment could result in the loss of promotional deals, incur additional interest charges and potentially leave a black mark on the cardholder’s credit profile.
Consumers who have existing credit card debts can transfer the balance to a card that offers 0% on balance transfers for a certain period of time. The advantage of these deals is that all the repayments then go towards paying off the capital rather than the interest, meaning the debt is paid off quicker and less interest is paid overall.
However, using balance transfer cards requires discipline. Missing or being late with just one payment could forfeit the interest-free benefit, with the card reverting to the typical APR. You could also be fined a £12 late payment charge.
Moneysupermarket.com has calculated if the card reverted to a rate of 18% and the customer had a balance of £2,000, missing one payment would result in additional interest charges of £339.27 over the year.
Peter Harrison, credit card expert at moneysupermarket.com, says: "An interest free balance transfer can be a great option for consumers looking for some financial flexibility, but many customers are unaware of the severe impact a single missed payment can result in.
“For those who do go down the balance transfer route, it's crucial that they make regular payments; otherwise they will not only receive a late payment charge, but could also lose their 0% deal.
"It's also worth noting that missing payments could have a negative effect on a customer's credit rating, making it harder to get accepted for products in the future.”
How to avoid getting into the red
So what can you do to keep your credit card debts under control?
Set up a direct debit for the minimum repayment each month as soon as you take out a balance transfer card. When you get your first statement check the direct debit has been set up correctly.
And if you can, try to repay more than the minimum each month by making additional repayments on top of the direct debit. This will bring the balance down and hopefully mean you can repay the debt before the 0% offer comes to an end.
If you won’t be able to pay off the debt before a 0% offer finishes, see if you can transfer the debt to another card that offers 0% on balance transfers – just be aware that most providers will charge you a fee (usually about 3%) for the transfer.
Once you’ve transferred your balance, make sure you don’t spend any money on the card as purchases will probably be charged at a higher rate.
If you can’t make a payment one month, ring your credit card provider and explain your situation. In some cases you might be able to persuade them not to end your promotional rate early.
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.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.