Credit cards Updated:
At this time of year, many people are flocking to 0% balance transfer cards in the hope of spreading the cost of their festive indulgence without being weighed down by hefty interest costs. However, the only way to make this work for you is to be truly organised in your approach, because if you miss a monthly repayment, you could be in for an expensive shock.
Research from The Co-operative Bank has found that 25% of those who've taken advantage of a 0% balance transfer card in the last five years have breached the terms of the offer, and as a result, they've had the 0% rate withdrawn early – with expensive consequences.
Credit card providers are well within their rights to do this. Typically, the terms and conditions of a 0% deal will state that it can be withdrawn if a customer makes a late payment, misses one altogether or goes over the credit limit, and not only can this result in a higher APR, but things like late payment charges could be levied, too.
Worryingly, some people aren't even aware that this could happen – 37% of those who've had a balance transfer card didn't know that the provider could remove the promotional rate if they missed a payment, while 34% were unaware that the same could happen if they exceeded their credit limit – which highlights the importance of fully understanding the terms and conditions.
The figures went on to reveal that 29% of cardholders with a balance transfer offer admitted to making these kinds of mistakes in the past, and for many, it led to a swift withdrawal of the offer: on average, consumers who made a mistake lost the 0% offer just four months into the deal, while 22% didn't even get to enjoy one month of zero interest as the promotion was almost instantly withdrawn.
This means that many will be facing higher APRs far sooner than they expected, for if the 0% offer is withdrawn, the card will typically revert to its standard APR, which means that people will be spending more in interest as a result. In fact, the figures show that falling foul of balance transfer conditions has collectively cost cardholders up to £1.2bn in interest payments per year, so it could pay to stay on top of things.
"Many cardholders only keep the promotional offer for a matter of months, despite paying an initial fee for the benefit," said Matthew Carter of the Co-operative Bank. "A balance transfer credit card [can be] an effective way to manage debt and cut the cost of borrowing by consolidating outstanding credit balances into one repayment, yet our study shows that many cardholders never really benefit from these headline promotions, as small mistakes prove costly.
"Cardholders should be aware of their Ts&Cs and take action to minimise the likelihood of missing, or making, a late payment by setting up a direct debit for at least the minimum amount."
So, you've made a mistake and have forfeited your 0% interest term, and are now facing a worryingly high APR until you've cleared your credit card balance. Is there anything else you can do?
Well, some borrowers look to the alternatives, with the Co-op survey showing that 41% of those who lost a promotional offer took out a personal loan to meet their repayments. A further 23% took more direct action by repaying the full balance straightaway, while 25% said that the card's credit limit reduced to the amount they'd transferred to it, sensibly avoiding the possibility of racking up more debt.
However, 38% dipped into their savings to cover the extra cost of repayments, while the same amount (38%) turned to their overdraft, and this last one in particular should be avoided if at all possible. Using an overdraft can be one of the most expensive forms of borrowing around, so if you can, try to use alternative means, and perhaps work on building up your credit rating (you can use credit check providers such as Experian to help) to increase your chances of being accepted for a 0% balance transfer credit card in future.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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