The top 5 balance transfer traps

Published:
23 January 2013
Topic:
News,Money,Credit Cards

If one of your New Year resolutions has been to get a hand on your finances - which includes clearing credit card debt - a balance transfer card can present a great way to get back in control.

Transferring an existing balance onto a card which offers an interest-free period can help you make real headway, as your repayments go towards clearing the actual debt rather than just the interest you are accruing.

However, transferring a balance isn't without its pitfalls. Steer clear of these top five...

1. Forgetting the fee

When transferring your balance, the new credit card provider will generally charge a balance transfer fee which is a percentage of the debt you are transferring - so be prepared.

The fee will vary between providers but it's usually around 3%. For example, if you had a debt of £2,500 and were charged a fee of 3%, you would be charged £75. This would then be added to the balance on your new card.

While this may initially seem a large sum, when you weigh it up against the benefits of having a long interest-free period to get your head above water, it's could be a small price to pay.

However, you'll need to prioritise what it is you want to get out of your card.

For example, if you want the longest 0% period possible, you could consider the market-leading Barclaycard Platinum with Extended Balance Transfer. This would give you a mammoth 25 months - - the longest ever 0% balance transfer period -  to pay off your debt interest free, after which the representative annual percentage rate (APR) reverts to 18.9% (variable).

However, the fee on this card is 3.2%, which compares to the 2.85% charged by the MBNA Platinum Credit Card - though this card only offers 23 months' interest-free.

If you're transferring a large balance, clearly the fee will be more. So if this is the case, you may want to take advantage of the current offer on the Lloyds Platinum MasterCard. While it has a slightly shorter interest-free period than the market leader at 21 months, it is currently offering a 50% reduction on its fee, meaning you would only pay 1.5%.

To benefit from this, you would need to apply for the card before February 23, and transfer your balance before March 23.

2. Not paying off debt within the 0% period

It's easy to be dazzled when you see a generous 0% interest period. However, it is essential that you work out exactly when the period ends and the card reverts to charging what is probably a hefty APR - even the average is 17.32%.

The last thing you want to do is pay off just the minimum off each month and suddenly get hit with a huge rate of interest which lands you back in exactly the same situation.

To get the most out of a 0% interest card you need to pay off as much as you can afford every month in a bid to clear the balance before the offer ends.

A good way is to work out how much you would need to pay each month to clear the debt and then set up a direct debit from your current account to your credit card for that amount.

If, however, you realise you are not going to be able to clear it, pay what you can and be prepared to move your balance again at the end of the deal.

3. Assuming you can transfer debt to any card

Generally speaking you won't be able to move an old balance to a new card that is issued by the same provider. While this is clear with brands such as Barclaycard or Halifax, in other cases, it isn't always as obvious.

NatWest and RBS are effectively the same provider for example, while MBNA issues the Virgin balance transfer credit card along with a variety of others including football-branded deals like the Chelsea FC credit card and the Liverpool FC rewards card.

If the best balance transfer deal is offered by the same provider of your existing card, shop around for the next best deal.

While you are at it, bear in mind that the most competitive balance transfer credit cards are reserved only for those with sparkling credit ratings. If you are not sure that yours is up-to-scratch, use our SmartSearch tool which will give you an indication of whether or not you will be accepted without leaving a footprint on your official credit file.

4. Failing to manage your payments

Perks such as 0% on balance transfer deals only apply if you use the credit card as agreed under the terms and conditions - and this means making the minimum repayments on time every month. Fail to do this and your 0% balance transfer privilege could be removed, which would leave you paying the sky-high APR much earlier than expected. Card providers' rules differ on this but, to be on the safe side, make sure you make all minimum repayments (preferably more) in full and on time.

5. Getting further into debt

The final pitfall is perhaps the most dangerous.

When adding another credit card to your purse or wallet, you are getting an additional borrowing limit. Generally, the maximum amount of your credit limit you can use for your balance transfer is between 80% and 95%, so even if you are using it all, there will be extra borrowing capacity there to tempt you.

Be strict with yourself so you don't get further into debt. Once you have transferred your balance, make sure you destroy any old cards that you don't want and close the accounts.

As well as removing temptation, this also reduces the amount of potential borrowing which lenders can take into consideration when you apply for new credit.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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