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Monday, 3rd August 2009
Will a 0% credit card balance transfer solve my debt problems?
Heed this warning because once you move balances from an old credit card lender to a new credit card provider and you quickly fall into arrears then the new lender may not support you in any proposed Individual Voluntary Arrangement, IVA or Debt Management Program, DMP.
The reason is simple; as they have only just advanced the money as a new lender they require payment as per their agreed terms. Had you sought advice with your debts before moving to the new 0% balance transfer then the chances of your credit card company supporting any debt option would be much greater.
Without knowing the full picture it is just irresponsible for anyone to say, ‘move your credit card balance to a 0% lender to solve your debt problems’. You have been warned!
How can I check to see if I can afford the 0% credit card balance transfer?
Our free budget form will help you work this out.
80% of those that come to us for help with their money worries have not used a budget form, a key factor in their getting into unmanageable debt.
The DebtWizard budget form, which is free, not only helps you avoid getting into debt but if you are in debt already will quickly establish your position and predict how much your debt will increase over the next 5 years.
Still thinking of transfering to a 0% credit card?
If you still wish to transfer your credit card balance to another card provider at 0% interest ask yourself, ‘am I really going to get a good deal?’ In an increasingly competitive credit card market companies need to maintain their profits and they do this even with 0% balance transfers. Here, Mike Thomas head of debtwizard.com, explains the finer points of credit card deals and how to avoid the pitfalls.
The credit card balance transfer fee
This can be anywhere between 2% and 5%, and is often labeled an ‘admin fee’ and can be quite costly if you have a small balance which you intend to clear quickly, in which case you could consider going for a ‘short term no balance transfer fee’ deal. For large amounts it is important to have a long period on the 0% rate and then the balance transfer fee becomes less significant.
The cash advance on a credit card
This is an expensive way of getting cash as some companies will charge very high rates of interest. Remember, this debt will be added to the end of what has to be repaid on the balance transfer. If you think you are paying 0% interest on this cash advance then think again. This cash withdrawal could attract in excess of 26% interest and is usually repaid once you have cleared the balance you previously transferred.
The Holiday/Foreign transaction on a credit card
Credit card providers earn millions in foreign transactions so it is no wonder they view these dealings with glee!
You could be charged between 2.75% and 2.9% on every transaction made abroad and in some cases, in addition, a cash withdrawal fee, together totaling 5.75% or more.
To avoid these extra charges use a zero interest rated credit card which allows free use abroad and free withdrawals.
Why you must make that first payment on the balance transfer deal
You need to set up a direct debit with the credit card company to pay at least the minimum amount in time to make your first payment. If they delay it, and it is in their interest to do so, and it does not get paid then you will be charged the £12 fee for late payment as well as the balance transfer fee - 3% on £6,000 - £180! You could also find that the special introductory offer has been withdrawn.
Not all credit card companies operate in this way but I have had a number of clients caught out by this technique and they have also ended up paying interest on the balance before they can arrange another card provider. To avoid this happening and for peace of mind, consider making the first payment manually, in plenty of time.
Advantages of using a credit card
Paying for one item over £100 with plastic offers the benefit of extra consumer protection, in addition to those legally required by section 75 of the Consumer Credit Act. For example if you do not receive the goods you ordered or the firm goes bust then in theory the credit card company will reimburse you.
Section 75 of the CCA makes the card company liable (along with the seller of goods or services) in case of breach of contract.
During the interest-free or low-interest period, aim to reduce the balance as much as possible and don’t use the card for new purchases. Alternatively, if you have the cash to clear the balance in full then why not put this into a high interest ISA until the deal ends? You could then make a profit. If you are unable to clear all the balance, consider taking out a loan at a far lower interest rate than the normal charge on the credit card and you could clear your debt more quickly.
Avoid multiple applications for credit as you will end up leaving ‘credit footprints’ on your credit file (they stay on your record for a year) which future lenders will see. This can make a lender wary as they may consider you to be desperate for money or think that fraudulent applications are being made. Either of these will have a detrimental affect on your credit rating.
If you want to protect your file be sure to make it clear to any lender you approach that you only want a quotation, and this will not leave a ‘footprint’ on your credit report.
Finally, make a note of when the introductory offer ends as missing this date could be costly!
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