Getting out of credit card debt can be extraordinarily difficult. For some people, it may even seem impossible. This is perhaps one of the reasons that credit card debt in the UK stands at a staggering £72.5bn as of 2019.
Balance transfer credit cards with 0% introductory rate offers are one of the ways that consumers try to stay ahead of the game and protect themselves from seemingly irredeemable credit card debt.
A balance transfer can help you pay your debts faster and, at the same time, save money by avoiding the interest rate fee. Indeed, there are dozens of balance transfer cards available in the UK. Unfortunately, you have to be very wary, as misusing a balance transfer offer has the potential to dig you even further into a hole. Worse, some balance transfer offers can include tricks and traps that could prove to be very expensive for you in the long-term.
If you are actively looking for a balance transfer option to help you pay your debts faster, save money or even have some breathing space as your reorganise your finances, you can use the following tips to identity and avoid the most common traps.
1. Read the fine print of the 0% balance transfer offer very carefully
This is the most important tip. Before you get too excited about the 0% offer, read the fine print of the whole offer carefully. The fine print will contain all the terms and conditions of your balance transfer.
Pay particular attention to information regarding the actual balance transfer fee (or any offers related to it), penalties (e.g. for late and missed payments) and interest rates for purchases and other non-repayment transactions.
Do not hesitate to ask the card issuer questions about any details that seem ambiguous or that you do not understand.
2. Be aware that costs in time may negate the 0% offer
While a balance transfer offer can save you a lot of money, in some scenarios there might not be much difference between what you’ll end up paying on the new card with the balance transfer offer and your current card. Specifically, for cards that include a balance transfer fee, that fee could end up being almost as much as the actual interest you would have paid if you had stuck with your existing card. This is often the case for balances that could be paid off in a few months.
For instance, suppose that:
- You have a balance of £1,200 whose interest is 18.2%.
- Your plan is to pay off this balance in the next three months.
- Your monthly repayment will be £400.
In the end, the total interest you will pay will be £37.70. If you were to transfer this balance at a fee of 3%, you would have to pay a total fee of £36. Therefore, you would only save £1.70.
Is that really worth it? Probably not. Don’t forget that your time has value too. If you take that into account, and think about how much time it’ll take you to apply for the card, get it set up and make the balance transfer, it’s almost surely not worth the small amount you’ll save.
As you can see, if you are confident of paying off your balance in a few months, the savings associated with transferring it to a balance transfer card may be not worth the transfer itself. However, if you cannot pay the debt in the short term (which is the case for many people), then a balance transfer could be your best option.
You can apply this rule to help guide you: For smaller balances that you do not need a long time to pay for, avoid 0% balance transfer offers that have a transfer fee. For larger balances that might require more time to pay off, taking advantage of a 0% balance transfer offer, even if it has a balance transfer fee, could be a savvy move.
3. Check when the 0% period actually starts and ends
Depending on the issuer of your balance transfer, the 0% introductory period may commence either on the day you open your new account or when your debt first arrives on the new card.
Suppose, according to the terms of your issuer, the introductory period begins on the day of account opening, but you incorrectly assume that it actually begins when your debt arrives on the new card.
If your debt ends up taking longer than expected to arrive on your new card, the introductory period – and therefore the 0% offer – could be almost over by the time it arrives. You will then be forced to start paying the normal APR sooner than you think. This is obviously a situation you do not want to find yourself in.
Therefore, when taking on a new balance transfer offer, make sure that you are fully aware of the time specifics of the introductory period, and that you arrange the information on the balance you’re transferring so that you can make the transfer as quickly as possible.
4. Find out the implications of a late or a missed payment
A single missed or late payment on a balance transfer card may have disastrous consequences. The most common is the forfeiture of the 0% interest rate and the subsequent application of an interest rate that will be determined by the issuer. Consecutive missed or late payments may attract even greater penalties, including the increase of the already applied rate.
If you think that you might miss a payment date in the foreseeable future, ensure you are aware of the associated penalties. Assess their fairness according to your circumstances and the impact they might have on your overall ability to pay your debt.
5. Check whether the 0% interest rate applies to balance transfers only or to new purchases also
When you take out a 0% balance transfer card, you may think to yourself, ‘Fantastic! No worries about interest charges for a good, long while!’
Right? Well, not necessarily.
While a 0% balance transfer offer will allow you to avoid interest on the balance you’ve transferred to the card, it doesn’t necessarily give you a 0% interst period for new purchases. New purchases made after your balance transfer are not always subject to the 0% rate. The reality is that unless the offer explicitly states that there is also a 0% introductory rate on new purchases, any new purchases made using the balance transfer card will be subject to the card’s standard APR. Consequently, it may be best to avoid making purchases with your new balance transfer card and instead focus on just paying your debt.
Key takeaway
A balance transfer may come in handy if you do not wish to fall into a credit card debt that might be incredibly difficult to get out of. It may help you to pay your debts faster while saving money on interest.
However, as highlighted here, there are several pitfalls that can come with balance transfers. If not identified and taken care of, these pitfalls might prove to be very expensive. The tips outlined above can hopefully help you identify the majority of these potential balance-transfer missteps and avoid them.
Of primary importance is to always read the fine print of the 0% balance transfer offer very carefully, and ask relevant questions to the issuer to make sure you fully understand everything about the offer.
