If you have rising debts, it can feel as though the world is conspiring against you. Interest payments on loans and more especially on credit cards can quickly mount up as the compounding effect of interest bites. Manageable debt left for a matter of months can quickly become unwieldy, with minimum payments rarely making more than the smallest dent in the amount owed.
At times like this it can seem preferable to ignore debts until you feel ready to deal with them. Unfortunately, inaction is often the worse course someone can take, as debt quickly spirals further out of control.
Can you tackle your debt problem alone?
Depending on your income and how indebted you are, you may be able to get help dealing with your debt. As a general rule, if you are struggling to pay your bills, then you should seek help.
Debt charities are a good place to start, but be sure you are approaching a bonafide charity, such as:
If you do feel you are in a position to tackle your debt alone, then there are options available:
Consolidating debt with a balance transfer card
Balance transfer cards have long been a popular feature of the UK credit card market. In fact, the UK boasts the longest 0% transfers anywhere in the world, and competition amongst card issuers is always intense.
Balance transfer credit cards offer you the ability to move debt, typically high-interest debt held on an existing card, to a new card and pay 0% interest on the debt for a set period. This means you can often reduce your annual interest payments from around 20%-30% to 0%, with a single transfer.
Transferring a balance incurs a 'transfer fee' so it is not free, but given that transfer fees are a one-off charge of around 3%-4% of the amount transferred they are a much cheaper alternative than the interest that accrues their introductory period (often over three years).
For example. A debt of £3,000 at an APR of 20% would accrue around £1,350 in interest over three years if the card holder paid £85 per month. A balance transfer card might incur an initial charge of £90 (3% of the total balance), but no further interest is charged for the introductory period - saving around £1,250 in interest payments
Getting the best balance transfer card for you
People who feel overindebted often assume that their options for additional credit are limited. While this is true to a degree, it does not mean that there no options whatsoever. In fact, there are probably more options now than ever before, and many of them present little or no risk to your credit score.
Some of the most recognisable UK balance transfer card issuers now include a soft-search pre-approval tool in their application, so only customers who are likely to be accepted are permitted to make a full application. These can be used to assess your chance of a successful application before a full application, which appears on your credit record, is made.
If these pre-approval tools show you have little chance of being accepted there are also bad credit, and credit building, balance transfer cards which can offer some respite against ever-mounting debt.
How to balance transfer for maximum effect
Getting a balance transfer card will go a long way to help solve your debt problems, but there are a number of ways you can maximise its positive effects.
Get your minimum payments right.
Depending on the credit card you get, your minimum payment is likely to change when you switch (it could go up or down, as each lender operates a different minimum payment formula). However, as you make your minimum payments, you will notice they decline far more rapidly than it would on your original card (because you are not paying interest). As this happens, the temptation is often to spend the extra money. But, if you're serious about clearing your debt you should at least maintain your original minimum payment (which should be the most it will ever be, if you don't spend on the card). Ideally, you would pay more. Divide the total balance by the number of months you have at 0% and pay in equal instalments so you clear your debt in full.
Make your minimum payments on time
Once you have your transfer card, you do not want to lose your preferential interest rate. The main reason people do forfeit their 0% deal is because they do not make their minimum payment at all, and/or they do not make it by the due date. If you miss a payment or pay late, your card issuer will almost certainly revert your balance to their standard APR, which effectively takes you back to square one. Avoid this by paying (at least) your minimum, and ensuring it arrives in a timely manner. Cheques, bank transfers, direct debits, etc. take different times to clear - make sure you factor that in when you arrange your payments.
Don't use your card for purchases
Balance transfer cards are ideal for transferring existing balances, but they should not be used for purchases, or withdrawing money. Interest rates for purchases and cash advances are usually at the high standard rates, so you'll be mixing expensive debt with your cheap 0% debt. Although your card issuer is obliged to use your minimum payment to pay your most expensive debt first, this will reduce the positive effect of your balance transfer considerably. If you do need to make purchases; get a 0% purchase card, as this will enable you to defer purchase interest for a while.
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