3 problems with balance transfer credit cards

Category: Credit cards
Date: 1/12/2012

Searching for the best 0% balance transfer credit cards? You'll probably have noticed that it's getting pretty competitive out there, with lots of great deals on offer. However, transferring debt onto a new piece of plastic doesn't come without its pitfalls.

So before applying for a new credit card, here are 3 potential problems to be aware of…

1. You may not repay your debt with a 0% balance transfer credit card

Transferring a balance can be a great way to repay debt more efficiently. Even though there will be a balance transfer fee (usually around 3% of the amount you are transferring), the savings you can make will far outweigh this one-off charge.

Before applying for that shiny new 0% balance transfer credit card you need to ask: "where do I want my debt to be in a year's time?"

If you transfer a balance and only make the minimum payment each month, you will be making bigger inroads into your debt than on a standard credit card. However, you should really aim to repay over and above the minimum to make the very most of the 0% rate.

Lenders can offer such good balance transfer deals because they know that a lot of people won't clear their debt before the end of the 0% period. Once the balance transfer period ends, your debt then goes on to the lender's standard rate of interest – this can be around the 16% mark, or higher!

Make a repayment plan

Set up a Standing Order for as much as you can afford to clear the debt before the end of the introductory 0% period. If you're not going to make it, be ready to transfer the balance again at the end of the deal.

If you have been moving your debt around various 0% balance transfer cards for a few years, consider taking out a personal loan.

Be sure you can commit to and afford the payment though. The loan payment is going to be higher than making the minimum repayment on your credit card – but it will be worth it in the long run as the debt will be gone at the end of the term.

Make sure you destroy and close old cards to avoid letting new debt into your life.

2. You might not be able to transfer a balance

Some of the big credit card operators provide several different cards, under different names that don't make it obvious that they are provided by the same bank.

If you want to transfer a balance it may not be possible if the credit card being transferred from, and the new card you are transferring to, are both provided by the same lender. A good example of this is Virgin Money and MBNA – both cards are provided by MBNA so you can't transfer balances between them.

Find out who your credit card is provided by.

3. You could end up in further debt

When applying for a 0% balance transfer credit card you are doing something quite dangerous – you're adding another card to your wallet or purse.

Instead of only spending a certain amount on your cards, you can now spend a bit more due to the addition of another borrowing limit.

Once the balances have been transferred to the new credit card, make sure you:

• Cut up any cards that you don't want to spend on.
• Close any credit card accounts you don't have balances on.
  As well as removing temptation to spend on the account, this has another purpose. When being assessed for new credit, such as a mortgage, some lenders may take into account the amount of potential debt you could have, not just the amount of debt you actually have.
• Reduce credit limits on any remaining credit cards.
  One argument against reducing a credit limit is that you might need it in an emergency. Total up all the available credit you have. It's easy for this to run into several thousands of pounds - would all of this be needed in an emergency?

What next?

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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 anytime.