The dangers of card tarting
By Michael Lloyd
Repeatedly taking out 0% balance transfer deals to move credit card debt around can save you a small fortune when done sensibly, but can often lead to serious debt problems if you don't close the old accounts. The debt-shuffling practice, often called "card tarting", may help you avoid hefty interest charges, but it can be a recipe for disaster if you're tempted to spend on your other cards.
"We see this a lot when asking how a debt was built up," PayPlan money adviser Jane Clack said in an emailed response to questions. "Clients consolidate, but do not tear up their old cards ‘just in case there's an emergency'. My worst case was where this happened three times before they came to us, and the last time they had secured the debt against their house."
Case-in-point: Janice, a 43-year-old PayPlan client, found herself in debt after relying on credit cards to fund her lifestyle. She worked in London and was earning a good wage, but admits accessing 0% deals was too easy.
"I ended up with five cards in total," she said. "I'd transfer the balance off one to a 0% interest card, but then not cut up the original and continue using it. It was just too easy; it wasn't like using real money." Janice eventually owed £20,000, and was forced to enter into an Individual Voluntary Arrangement (IVA) with a debt management company.
Tarting is a slippery slope
While it can be tempting, and sometimes wise, to keep a cleared card
open for emergencies, alarm bells should start ringing if you're regularly relying on one to meet everyday expenses or to pay for luxury items. Balance transfers should be used for clearing debt while paying as little interest as possible, not for freeing up cash to fund spending you can't afford. If you do, you can create a slew of problems.
instance, being regularly approved for new balance transfer offers may lead you
to believe you'll always be able to take out a new deal. However,
if you're habitually spending on cards you should have cancelled after clearing, the time will come when you'll no longer be able to qualify for new 0% offers, even if you're making your payments on time and staying within your borrowing limits.
That's because if you're maxing out cleared cards time after time and frequently applying for new 0% transfer deals, you'll start to appear as though you're becoming over-reliant on credit. Unable to access fresh 0% deals, you'll end up paying a high rate of interest on the money you've borrowed when your promotional offers end. Pretty soon, you're unable to keep up with payments.
"If you have accounts open that you previously cleared the balance on, make sure you can afford to pay back what you spend if you're tempted to start using the card again," James Jones, head of consumer affairs at Experian, said in an emailed response to questions. "Missed or late payments can stay on your credit report for a minimum of six years, and thus could negatively affect how a lender views you when you make any future applications for credit."
Other dangers could present
Creating a debt avalanche isn't all you have to worry about. If you do end up spending on your old cards after transferring their balances to a new card, you could raise your credit utilisation ratio, which is the amount of credit you have available divided by the amount you're using. You should keep your ratio as low as possible, since your utilisation ratio accounts for 30% of your credit score.
Card tarts can also suffer if the economy takes a dive and lending dries up. When the credit crunch hit in the late 2000s, many borrowers were lumbered with expensive credit card debt after lenders scaled back balance transfer deals, only offering them to people with excellent credit scores.
While balance transfer availability appears to have returned to pre-crunch levels, and lenders are now offering record-breaking deals, there is always a chance you could be left with nowhere to turn if the economy takes a turn for the worse.
Closing old cards actually beneficial
"'Emergencies' seem to happen more often when there is credit available to pay for them," Clack said. For instance, you may have food in the house already, but when you have available credit, ordering take-away seems like no big deal. If you remove the temptation, you can save yourself money (and a headache) later.
And closing old accounts can have a positive impact on your credit file by showing potential lenders that you've settled what you owe, as well as making sure you won't be able to start using your freed up balance. So, if you're going to try your hand at card tarting, remove the temptation to start spending on cleared cards by making sure you close settled accounts.See related: Need a balance transfer? Check your wallet first, 4 tips for avoiding balance-transfer traps, Many applicants denied best balance transfer deals
Published: 22 October 2015
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