Credit Card Balance Transfer Unravelled

Most of us rely on credit cards to make our lives easier. As a nation we currently owe £64.1 billion on credit cards and transferring balances between cards is becoming increasingly popular way of dealing with our debt.

According to Fairinvestment.co.uk 7% of respondents to a recent survey said they regard balance transfers as a method of managing their credit card debt. The re-emergence of free balance transfer free offers is set to fuel this market.

Earlier this month however the Conservative Party criticised credit card providers for luring customers into borrowing money with offers like this. This led to a backlash from within the industry.

It is true that although on the surface 0% balance transfer fees are extremely attractive, there are often other costs involved that are not immediately apparent.

As David Aitken, FCCA Managing Director of Executive Financial Solutions points out: “Be aware on 0% credit card deals that if you miss even one monthly repayment, or exceed your credit limit, the interest rate will revert to the full, often exorbitant, rate. Penalty charges that apply also vary from card to card...The interest rate you’re paying can be worked out by simply dividing the interest charged per year by the money outstanding.”

But says Steve Willey, Head of Credit Cards at moneysupermarket.com believes 0% credit cards do have their place: "Shadow business secretary Alan Duncan has missed the point and shown some naivety when he says 0% offers are not acceptable practice. A 0% offer on balance transfers or purchases is an excellent offer for most Brits,” he says. “The problem lies in the fact that when a new 0% credit card is taken out, the other card isn't closed. Typically this means that someone with £5,000 worth of credit now has a £10,000 credit line – and the more cards they get, the worse the situation can potentially become."

John Hall, Chief Executive of Personal Debt solutions firm newtomorrow.com says the key is to plan ahead and understand what you are signing up for. "You must always remember to plan for when the zero interest period comes to an end to avoid any interest payments,” he warns. “You also have to be careful to ensure that you understand the terms of the transfer in full. Many credit cards that offer 0% on transfers charge a fee for the transfer. So whilst you are not paying interest for a period your debt has automatically increased by something like 2% of the balance."
It is vital that you are aware of and understand the upfront fees, which can be costlier than spreading interest payments over a year. According to Fool.co.uk a 3% upfront fee for a one-year deal comes to a yearly interest rate of 5.6% AER (Annual Equivalent Rate). For a six month deal, the 3% fee is the equivalent of 10.7% AER.

“Consumers who intend to use 0% balance-transfer cards need to be aware that while there may be a plethora of cards, there are effectively only nine genuine cards that will do what they say on the tin,” says David Kuo, Head of Personal Finance at Fool.co.uk. It says these cards are available from Abbey, Bank of Ireland, Barclaycard, Citi, Egg, HBOS, MBNA, Nationwide and the Royal Bank of Scotland.

The key is to review your credit cards on a regular basis and ensure that you’re fully aware of the current rate that you’re paying on each card. “Choose credit cards cleverly by selecting different cards for different jobs,” recommends David Aitken of Executive Financial Solutions. “One card might offer great rates on balance transfers, but exorbitant interest on new purchases, whilst another is completely the opposite.”