How balance transfers can reduce your existing debts
Taking advantage of balance transfers can reduce the cost of borrowing by hundreds of pounds. This works by taking out a new credit card with a far lower interest rate and then transferring the debts from your old credit cards to the new one.
Although you still owe the same amount of money, by reducing the interest rate, you pay off the debt more quickly, saving money in the long term. For example, if you’re currently paying off a credit card debt at 18.9% APR and you complete a balance transfer to a lower-rate deal of 6.9%, you’ll save approximately £120 interest in a year on a debt of £1,200.
The golden rules of balance transfers
If you’re considering balance transfers, there are guidelines you must follow to ensure you don’t run up more debts.
If you’ve done a balance transfer to a credit card with an introductory offer of 0% interest, clear your debt before the end of the zero interest period. If you’re not able to do this, look round for another 0% or lower interest card and do another balance transfer. Otherwise, your costs are likely to rocket again.
Never miss your monthly repayment, as this will lead to late payment charges and you’ll start running up your debt again. Never spend money on your new credit card. Remember its sole purpose is to reduce your existing debt, so don’t start withdrawing cash on it once the balance starts reducing.
Before you apply for a new credit card, if you have a poor credit rating, remember you can adversely affect your credit score by applying for a card for which you have little chance of being accepted. If you apply for a number of cards and are refused, this could affect your credit rating.
Some online comparison sites offer a free eligibility checker and advice on cards for people with bad credit. Although there’s no guarantee you’ll be accepted for the card for which you apply, an eligibility checker will estimate the odds of you being accepted, given your current circumstances, so it will help minimise the number of applications.
Making repayments to your new credit card
When you’ve done a balance transfer, it helps to pay off the debt as soon as you can, so try to pay a bit more each month. If this isn’t possible, always make sure you pay at least the monthly minimum payment. Failure to do so with some cards could lead to you losing the cheap rate. You may find your card provider withdraws the deal, leaving you on a more expensive rate.
You may not get the deal for which you apply
Always bear in mind there’s a catch to the 0% interest deals, based on customers’ credit history. For example, you may find, when you apply, that because of your credit history, the 0% interest balance transfer deal advertised may be offered to you for only 20 months, rather than the 36 months you’re anticipating.
If you check out new credit cards on comparison websites, an indicator of this is when the card provider puts the words “up to” before their headline balance transfer offer. For example, it may say, “Up to 36 months’ interest free credit on balance transfers.” This covers them if, after applying, you’re offered a shorter period to pay off the balance transfer at the low or zero interest rate.
Cutting debts without new credit cards
If your credit rating is too poor to apply for a new card, check out your existing cards and if they’re not maxed out, transfer the balances from the ones with high interest rates to others that have lower interest rates. It’s a case of shifting your debts around to save on interest.