4 tips for avoiding balance-transfer traps
By Benjamin Salisbury
Many consumers have been able to take advantage of balance transfer deals that allow them to transfer a balance for a small fee, then pay it off interest-free for up to 40 months. In theory, these deals are great for paying off a large balance without the stress of a short timeline. But there are potential traps along the way.
The biggest trap: not paying off your transferred debt before the introductory period ends.
The Financial Conduct Authority's July 2016 Market Study found a significant number of consumers don't manage to repay their transferred balances before the introductory period ends, and as a result end up paying higher-than-average interest rates on the remaining balance.
To help remind customers the introductory period is ending, the FCA is recommending credit card companies send text alerts to balance transfer cardholders.
"Notifications about a low-rate deal coming to an end would help some people to stay on top of their finances," StepChange Debt Charity spokesman Edward Ware said in an emailed response to questions.
The FCA will be publishing further information on the voluntary remedies later this year, Richard Koch, head of policy at The UK Cards Association, said in an emailed response to questions.
But until new rules or remedies come into play, it's up to you to stay on top of your balance transfer and avoid running into trouble. Try these four tips to avoid common traps of balance transfer cards:
overlook upfront costs.
To transfer a debt from another card, customers normally pay a balance transfer fee, a percentage of the overall amount being transferred, typically 2-3%.
For example, transferring a £3,000 balance at 2.5%, would cost £75. If you manage the card effectively, financial experts say that's a small price to pay to get an extended period to repay for free.
mistakes can be costly.
Miss a payment or go over your credit limit, and you may find your lender terminates your 0% balance transfer offer.
You may be able to negotiate with your provider if you have extenuating circumstances, but more likely than not, a missed payment or topping your card's limit will invalidate the terms and conditions of the credit card. As a result, the issuer has the right to start charging interest on the balance, plus penalty fees.
And once you've mismanaged one balance transfer, you may find that you won't be able to successfully apply for another 0% balance transfer offer. That could leave you financially squeezed.
0% credit cards only as temporary solutions.
To ensure you don't keep transferring balances, 0% balance transfer cards should be used only as a temporary solution. Even consumers who make on-time payments during the introductory 0% period can run into problems if they still have a balance after that period ends.
Many 0% balance transfer cards have a very high regular interest rate, and any balance on the card after the introductory period is subjected to that interest rate. Find out what the regular rate is before you apply.
"It is vital that people think very carefully before taking credit and always shop around for the best deal," Ware said. "Before signing up, they need to decide whether they will be able to pay the balance off before the introductory deal ends."
The aim of a balance transfer card is to clear the debt during the introductory offer period, not to keep moving the debt from card to card. Plus, repeatedly applying for credit cards can have a detrimental effect on your credit record.
your spending on the card that used to carry the balance
Problems can worsen if you continue to use the credit card you shifted the balance from in the first place.
But don't cancel the card, either. As long as the account is open, it's likely helping your credit score, as length of accounts and your credit utilization ratio are factors in calculating credit scores. Just use your former trusty card very gingerly. You don't want to get back into debt.
If you find you must use another credit card while paying off a balance transfer (some introductory rates apply only to the transferred balance, not new purchases), try applying for another card with 0% interest on purchases.
Yes, having too many credit accounts can make you less attractive to lenders, but if you can get a 0% interest card for your everyday purchases, that can help you avoid interest while you pay down your debt on the balance transfer card.
Balance transfer cards can be a smart option to help you get control of your finances and pay down debt built up on another card or cards. But you have to avoid the traps. Use the introductory rate period to gradually erase what you owe. And don't miss your payments, otherwise you'll be hit with a high penalty interest rate.
While a text alert from your card issuer reminding you of the end of the introductory low interest period would be a help, jot a note on your calendar, daily planner or even in your diary. That looming deadline may help you focus your efforts, and an even bigger motivation may be the thought that you may be debt-free in a matter of months.
Additional reporting by Michael Lloyd.
Updated: 1 September 2016
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