Balance transfer deal may not cure financial hangover
By Michael Lloyd and Marianne Curphey
Once the excitement of December holidays is over, many Brits spend January dreading the arrival of their latest credit card statement.
And, as is traditional in the first weeks of the year, card issuers are bombarding potential and existing customers with ever-longer 0% interest balance transfer offers, seemingly extending a lifeline to consumers who may have spent beyond their means while overcome with seasonal good cheer.
These balance transfer deals, though, may not be all they seem.
Just before the start of 2017, politicians and money advice services slammed lenders for attempting to "trap" struggling consumers into long-term, unsustainable debt by tempting them into balance transfer offers at a time when many would be regretting overspending.
These balance transfer offers can be a double-edged sword, PayPlan money adviser Jane Clack said in an emailed response to questions. She said inquiries for help at the debt management organisation typically spike by about 50% in January as people try to regain control of their finances after the holidays.
"The pressure of producing the perfect Christmas has led millions into debt, making balance transfer offers really appealing," Clack said. "If used properly, transferring a balance from a higher-interest credit card to a lower-interest one can be a great way to save money and get out of debt faster - but this doesn't come without risks, and could result in making your financial situation worse."
What could go wrong after you apply for a balance transfer? For a start, you might not be approved for a good deal.
David Black, banking specialist at Consumer Intelligence, said while some very generous balance transfer offers exist, not everyone can get them.
"You have to have a great credit rating to access the best deals," he said. "It's also apparent that some providers won't necessarily offer the full 0% introductory rate to all successful applicants."
Even if you are approved for a balance transfer card, Black said the lender may not allow you to transfer the full amount that you want, leaving you with two credit card bills. You'll also still be paying a high interest rate on the debt you're unable to shift. And if you have two open cards, you have more available credit, which can tempt you to spend more.
Another pitfall: If you can't keep up with payments, you could lose the 0% interest agreement.
"If you end up missing a payment, some cards withdraw their balance transfer offer straightaway, meaning you're stuck paying whatever APR comes after the introductory period, which [may be] a lot higher than you were originally paying," Clack said.
Finally, if you haven't cleared what you owe by the time the no-interest period ends, you'll start paying your lender's standard variable rate. That rate could be as high - or higher - than the rate on your original card, said Andrew Hagger, founder of personal finance advice website MoneyComms.
This might tempt you into getting another balance transfer, but "if you are using several cards and constantly swapping debt between them, then that can be dangerous," said Jasmine Birtles, of Moneymagpie. It's much better to use a balance transfer as a one-time bridge.
Balance transfers can be a useful tool, but there are other ways to manage your debt.
One alternative is a "life of balance transfer" card. These cards allow you to transfer a balance and pay a low rate of interest, though not 0%, until you've cleared the balance. This means you won't have to worry about your rate shooting up at the end of an introductory offer.
If you have a reasonable credit rating, you may be able to qualify for one of these cards, which could charge less than half of what you're paying on your outstanding balance at the moment.
But sometimes, simply sitting down and really looking at where your money is going can help you see that you do have the means to pay down some debt.
"Create a budget, and see what you can actually afford to pay," Clack said. "Look at the budget realistically, and see if you are spending money that you do not need to spend."
This may be especially true of a reasonable amount of debt accrued over the holidays. Often, holiday spending is higher than regular expenses, but the additional amount is not insurmountable. You may find that by cutting back on other areas, at least temporarily, you can allot more funds toward debt for a few months. And if you keep up your temporary budget all year, dedicating the funds toward next year's holiday budget, you can avoid starting the cycle over next January.
Updated: 9 January 2017
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