Be Canny with Credit Cards

from Henlow Dec 2020

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Taking out a credit card to pay off a credit card might seem insane at first glance. But that’s exactly what a 0% balance transfer card is all about – as long as you use it the right way. It’s a strategy that’s absolutely not for everyone, but could be worth a look if you have good organisational skills, self-control and a decent credit record. You may come across two types of card, known as a balance transfer card and a money transfer card. Both work in a similar way: when you take out the card the new lender will pay money into an account you already have. You won’t have to pay any interest on this amount to the new lender as long as you pay it back by a set date, often twelve to eighteen months later. The difference is where the money goes. A balance transfer card means the money goes straight towards reducing or clearing your outstanding balance on another credit card. A money transfer card means the money goes into your bank account, reducing or clearing your overdraft. (There’s no point using a money transfer card if your bank account is in the black.) Using a transfer card doesn’t reduce your debt. However, it does give you breathing space during which you can put more of your spare money into clearing the debt rather than having it eaten up by interest. Of course, the deal comes with a couple of catches, which answer the question of what’s in it for the company issuing the new card. The first is that you’ll usually have to pay a fee up front when you take out the card. This will usually be something up to three percent of the amount you are transferring. Though this may seem a small sum, bear in mind this payment is a fee and doesn’t reduce your debt. The second catch is that the lenders issue such cards in the hope that you don’t simply pay off the outstanding debt before the end of the interest-free period. Instead they hope you’ll take advantage of the fact you can make purchases or withdraw cash on the balance transfer card just like any other credit card. This spending is not at 0% but rather will usually carry a high interest rate. Meanwhile, any of the transfer money that you haven’t repaid at the end of the interest free period will begin racking up interest at the card’s ‘standard’ rate, which is usually pretty uncompetitive. So, how to make the most of such cards? Firstly, avoid them unless you are confident you will at best clear the balance and at worst make a significant dent in it before the interest-free period ends. Next, make sure you never use the card other than to arrange the transfer. To avoid temptation, don’t activate or register it. You could even cut it up. It’s usually best to cancel the card once you’ve cleared the debt. Make certain you always make the minimum payment each month, preferably through a direct debit. Usually if you ever miss the minimum payment, the interestfree deal is immediately void and the card starts racking up interest right away. Whenever possible, make a manual payment that’s slightly higher than the minimum payment each month. Any time you only make a minimum payment will show up on your credit history and could be viewed negatively by lenders. It may be worth avoiding taking out such cards if you’re planning on getting a mortgage (or remortgaging) in the medium term. Lenders may see multiple cards on your credit report and assume you aren’t managing your money well. Look for online eligibility calculators. These will give you an idea of which cards you are most likely to be approved for, reducing the risk of being turned down or having to make multiple applications, again something that could hurt your credit record. Finally, take note that you can’t usually do a balance or money transfer between cards or accounts operated by the same lender or by lenders in the same banking group. You may need to check these groupings as they aren’t always obvious.