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3 problems with balance transfer credit cards

Category: Credit cards
Author: Tim Leonard
Updated: 12/03/2018

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 three 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 (typically around 3% of the amount you are transferring), the savings you can make should far outweigh this one-off charge.

But, 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 introductory balance transfer period ends, your debt goes on to the lender's standard rate of interest – this can be around the 19% mark, or higher!

Make a repayment plan

Start by doing a quick calculation to see how much you will need to pay each month in order to clear the debt before the 0% period comes to an end – divide the balance by the length of the 0% term, and voila! Set up a Standing Order for this amount, or if this is a bit out of your budget, start by arranging to pay as much as you can afford each month. If you're not going to be able to repay the full amount, 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.

But, be sure you can commit to and afford the monthly repayments. 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, and never use your balance transfer card to make purchases, as this will just add to your debt.

2. You might not be able to transfer a balance

Some of the big credit card providers offer several cards under different names, so it isn't always obvious that they're provided by the same bank.

It may not be possible to transfer a balance 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 Halifax and Bank of Scotland – both cards are provided by Bank of Scotland, 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 could be tempted to spend a bit more due to the addition of another borrowing limit.

So, to avoid temptation, 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. Tot 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? If not, reduce the limit!

What next?

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.