Best balance transfer and 0% APR credit cards
0% Balance Transfer – Will it really solve your debt problems?
When you’re in debt and paying interest on your debt, you may find that you don’t seem to be reducing the balance at all, or if you are it’s by very little. It may seem that you’ll be paying this debt for the rest of your life. If only you didn’t have all this interest to pay, you’d be able to get rid of the debt over the next couple of years or so. You get an email or letter from your bank offering you a credit card with the option of 0% balance transfer.
What’s it all about?
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What is a balance transfer?
A balance transfer is very simply moving debt or debts from one credit facility to another (the other usually a credit card). It is usually done to reduce the monthly payment amount and/or interest rate on existing borrowings.
Transferring your debt to a 0% credit facility like a credit card will mean that you won’t be paying interest on your debt for a period of time. Typical time periods can be six to 12 months.
What are the pros?
- The obvious, you will be paying no interest for a period of time, which means you will be able to reduce your debt and hopefully clear it quicker.
- Your monthly payment amount may be reduced
- You may be able to consolidate all your outstanding debts into one, meaning you only have to make one payment each month. It’s almost like having all your mess in that one room in your home rather than scattered around the house.
What are the cons?
- You may have to pay a fee to transfer your debts.
- You may not be able to transfer all your debts if the 0% credit limit is not high enough. This means you may still have to pay some debts outside your balance transfer each month.
- After the interest free period finishes, you may end up with a high interest rate which means that you may end up back in a situation where you are not really reducing your debt.
- If you miss a payment or payments, the 0% offer may be cancelled. That means you'll be paying interest on your debt once again!
We do have some deeper concerns about this if it is not handled correctly which is best explained by introducing Diane…
Diane had £10,000 worth of credit card debts. She was struggling to make enough of a payment towards the debt to make an impact on the capital (the actual amount borrowed without the interest). This is because the interest rate was so high, there seemed to be no light at the end of the tunnel.
Diane is a self-confessed shopaholic. When she’s feeling low this is her outlet. She grabs her credit card and goes shopping, that’s the reason she is in this situation in the first place.
One night in between Love Island and Made in Chelsea, Diane see’s someone talking about 0% credit card balance transfers and how your monthly payments will be reduced by going down this route. She’s immediately interested, she jumps onto the internet and onto a site that compares different offers. She finds one offered by her bank, even though she spends a lot she somehow manages to make all her payments on time so her credit rating is very high.
She makes an application online and gets accepted for a £12,000 credit card with 0% apr for 12 months and is very happy, she can now transfer all of her debts over to this card and pay a lower amount each month and no interest.
She intends to clear the debt over the 12 months before the interest kicks in.
12 months later....
12 months pass, let’s see how Diane is doing…… she’s not doing very well.
She had a £12,000 credit limit on her 0% card, her transfer took up just over £10,000 with a fee so she still had some credit left on the card.
The 0% offer covered spending on the card as well, during those 12 months, so she decided to take advantage of that and maxed the card out.
She broke up with her boyfriend which hit her hard. Her normal therapy for when she’s feeling down is to spend, with no more credit left on the 0% credit card what did she do?
Reigniting old flames
Diane still had the old credit cards that she racked up £10,000 worth of debt on. They were all cleared with the balance transfer. She promised herself she wouldn’t use them but right now, fraught with emotional grief, she just didn’t care! Straight to Leicester Square she went, the next day Westfield, then to Bluewater, throw in some nights out and a couple of girly holidays, the cards were back up to £8,000!
Now Diane had a total of £20,000 in credit card debt. That was part one of the problem, the other? The 0% credit card interest free period had expired.
When she took out the card, Diane didn’t pay attention to the interest rate after the 0% period expires. After all, she planned to have the debt cleared before that. Her interest rate was now three times the rate she had on her old cards. She was in trouble, big trouble.
Very little in life is free
When a lender gives you a 0% interest balance transfer offer, they do it in the hope that you will be paying interest later. In a lot of cases, they will make far more than they would normally have made. The offer is designed to win your business with the hope they will be able to retain it long term.
A temporary fix
Our concern with the method of transferring your debt to 0% credit card lies with the cards that remain, they now have credit available.
If you have not addressed the issues that have led you to the debt situation, you may find that the 0% balance transfer is only a temporary fix and you’re even worse off a short while down the line, just like Diane.
0% transfers can be great if you are disciplined and have a clear plan to clear the debt within the 0% period. If you are not disciplined when it comes to spending, having credit cards with available credit may be a temptation too hard to resist. If you don’t have a clear plan that you actually stick to, you may end up in a worse position than before. Diane is testament to that.
If you do take this route, be sure to cut up the original credit cards to help avoid this at the least!
The Real Debt Guy
Don't forget to read The Real Debt Guy's final thoughts below!