Recession-Busting Balance Transfers
When our economy first began to look shaky, paying off debt became a priority for many people. With unemployment on the rise and job security uncertain, knowing you owe less on credit cards and loans can improve your peace of mind.
But Christmas gets in the way of many good intentions – and if it scuppered your plans to be more sensible with money, you’re not alone.
However, the news that we’re officially in a recession may have forced you to address your festive financial hangover. According to the Office for National Statistics (ONS), the economy shrank by 1.5% in the final three months of 2008 – the worst contraction since 1980.
The best balance transfer card
Applying for a 0% balance transfer card is a great way to tackle expensive borrowing. Most credit cards charge between 16% and 17% APR on outstanding balances – so cutting your interest payments down to zero could make a huge difference to how quickly you can repay what you owe.
What’s more, moving your debt to a 0% deal will mean every penny you pay off your credit card chips away at your balance, rather than the interest being charged on top of it. This could save you hundreds, or even thousands, of pounds during the lifetime of your debt.
Right now, the best 0% deal on the market is the Virgin Credit Card, which offers a 16 month break from interest payments. If you applied today and received a new Virgin card next month, you’d pay no interest on your transferred debt until June 2010.
It’s important to note this card charges a 2.98% fee for balance transfers. This means that if you shifted a debt of £5,000 to it, you’d have to repay an additional £149.
Furthermore, although Virgin’s six-month 0% offer for new purchases is tempting, beware of using your card for shopping. If you spend on it and don’t pay off your purchases within the promotional period, you’ll be hit by negative payment hierarchy*.
The best of both worlds
If you already know you may need to spend on your balance transfer credit card, it makes sense to opt for one which has identical 0% balance transfer and 0% purchases periods. This way, you’ll avoid getting stung by negative payment hierarchy.
The Halifax All In One Credit Card offers borrowers the best of both worlds: a nine month 0% period on both balance transfers and purchases. As with the Virgin 0% card, if you shift a balance to the Halifax All In One card you’ll be charged a fee. This time, it’s 3%.
A low rate for a lifetime
Although using 0% balance transfers is an effective way to cut the cost of your debts, it’s not the only way.
Some cards (lifetime balance transfer cards) offer a low interest rate for balance transfers, which lasts until your whole debt is paid off.
Lifetime balance transfer credit cards have other advantages, too. In my view, their best feature is their simplicity.
Using a series of 0% cards to pay back your borrowing – also known as credit card ‘tarting’ – means regularly applying for new deals, as many times as it takes until you’ve completely repaid your debt. This requires commitment, organisational skill and a certain amount of luck.
However, opting for a lifetime balance transfer deal hopefully means you’ll only need to apply for one new credit card in order to deal with your debts.
Right now, one of the best lifetime balance transfer offers out there is the BT Rate For Life Card. It comes with a fixed interest rate of 6.9% on balance transfers, and a fee of 3%.
Again, spending on this card will mean you’re hit by negative payment hierarchy. Therefore, it’s not a good card to use for purchases.
Don’t forget…
It’s a good idea to check your credit rating before applying for any new financial product. Since the credit crunch, banks have become pickier about who they will lend to – and applying for a card you don’t get will not only disappoint you, it’ll leave a ‘footprint’ on your file which will make it harder for you to get credit elsewhere.
Also, it’s worth finding out which credit cards are run by which major companies. Both the Virgin and BT cards, for example, are operated by the MBNA group. This means that, if you already hold an MBNA card, it’s highly unlikely you’ll be accepted for a new one or be able to transfer your existing balance to it.
Finally, don’t forget: the monthly minimum repayments (MMRs) set by lenders are often so low that even small debts can take decades to repay. For example, Halifax Bank of Scotland has set the MMR on its cards at just 1%, or £5.
Paying off a fixed, affordable sum from your credit card every month is the fastest way to rid yourself of debt – and the worries that come with it.
Good luck!
*What is negative payment hierarchy?
Negative payment hierarchy is a system for ordering the different types of debt you may hold on a credit card. It means that the cheapest form of debt on the card (usually balance transfer debt) is paid off first, while more expensive debts (such as purchases debt and cash withdrawals) are paid off last.
This policy means the interest you’re being charged on the debts at the bottom of the pile continues to build up, costing you money while you tackle the cheaper debts at the top of the hierarchy.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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