0% Balance transfers

American Express announced earlier this week that they are going to stop offering 0% balance transfers to its new customers (read full article). 0% balance transfer cards are a popular choice when people are struggling to make the repayments on their existing credit card, but are they as good as they sound?

Transferring a balance to a 0% deal can save money and is considered to help a debtor become debt free. On a 0% deal no interest is paid until the deal runs out so if the debtor can repay the outstanding balance within that time they won’t pay any interest. It sounds like a great deal doesn’t it?

However these deals only work if at least the minimum payment is made, otherwise penalty charges may be incurred. Also they are only beneficial to those who can clear the balance before the deal expires. Once the interst free period has ended the standard rate will apply, which in many cases, is extremely high. So should there be an outstanding balance on the card, the monthly interest charges can quickly accumulate. This is avoided by many transferring their balances again to another 0% deal, people who do this regularly are known as ‘rate tarts’ and are thought to be costing the card issuers over Â£1bn a year.

In contract 0% deals can actually create a debt problem, or worsen it. Many who transfer their balance move it to a 0% card with a higher limit than the balance. A higher limit means a debtor may be tempted to spend more on their credit card, which can result in more debt. The 0% deal only relates to the transferred balance and the ‘purchase rate’ is often much higher. Lenders also automatically use the debtor’s monthly repayment to pay off the cheap balance transfer debts first. So interest, at the higher rate, is added to the amount spent on the card and quickly mounts up, as only a small amount of the balance is being repaid each month. Also some lenders only allow 90% of the debtors credit limit to be transfered, so 10% of the balance can still be incurring high interest.

As explained a debtor may actually incur more interest by switching to a 0% deal if they fail to clear the balance within the time limit or they can’t resist the urge to spend more on their credit card.Â If the 0% deals aren’t available long enough for the debtor to repay the balance, American Express and other lenders offer an alternative. Low ‘life-of-balance’ transfer rates, mean the debtor will benefit from a low interest rate until the balance is cleared. This rate doesn’t apply to ‘purchases’ which usually results in higher interest. Higher interest can be avoided by cutting up the card once the balance has been transfered. The ‘life-of-balance’ transfer removes the hassel of having to transfer the balance again when the deal expires.

Transferring balances is very common and often seen as the best way of solving debt problems but should the debts become unmanageable there are alternatives. Payplan offer free, impartial debt advice and may be able to provide solutions that result in interest being frozen.

Free yourself from debt today.

0% Balance transfers

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