Debt is inevitable for most people.
Whether it’s student loans, mortgages, credit cards or any other type of borrowing, everyone finds a way to borrow and spend money they probably don’t have.
According to the Money Charity, the average household credit card debt in the UK, excluding mortgages, was £2,655 in September. According to the Office of National Statistics, average earnings in the UK were around £504 per week.
This £2.6k of average monthly debt, including account interest, represents a significant part of the income from average UK citizens, meaning that it is likely to take several years to pay off debt.
With bills for rent, utilities and student loans, it may seem impossible to get a hold of your finances. Unfortunately, many turn to credit cards as a way to pay off debts, as credit card companies advertise zero per cent interest.
0% interest balance-transfer credit cards may seem like a fantastic solution to save money and avoid paying interest. However, credit card companies have to make a profit from the offers they make.
Why do they do offer 0%?
The truth is they benefit each time you move your balance to a credit card for a 0% interest rate offer; you’re hit with a 3% fee. If we use the national average debt of £2,600, that’s an additional £78 added to your credit card bill for being their customer.
And not everyone who has a 0% promotional offer pays it off during the year. Most households will still have more to pay off on their credit cards at the end of the 0% offer.
Many can switch their balances to a new 0% offer credit card, avoiding more interest (except the balance transfer fee). However, should households accrue an adverse credit history prior to the balance transfer – then they will be unable to switch.
Advantages of 0% credit cards
What are the advantages of 0% credit cards?
Let’s take a look.
1. Lower interest rate.
If you currently have a high-interest rate on your current credit card, transferring your balance to a credit card with no or a lower interest rate will give borrowers a chance to make a bigger dent in paying off their credit card balance.
More of your monthly repayment will go towards reducing the credit card balance, instead of towards paying the interest.
You may even be fortunate enough to repay the entire balance by the time the promotional period finishes.
2. Moving your balance to a credit card with better terms.
Not only will you get a promotional period, but your new credit card may also have better terms and conditions and reward you with cashback on your purchases.
You can then not only repay your balance sooner but if you must use a credit card, get a little extra back.
3. Consolidating your credit card debt means fewer payments each month.
Fewer credit card payments made each month reduces the hassle of making multiple payments and the risk of missing one.
Missing a payment can hurt your credit history and will lead to additional fees and interest being applied each month. Furthermore, it is much easier to pay off one larger balance at a time than several smaller ones.
Concerns with 0% balance transfer credit cards
Whatever debt they have paid off during the 0% period, they will now be paying interest on the remaining balance, plus the 3% fee from the original transfer.
It is this interest rate that is where many end up paying more than they ever borrowed.
Let us assume they make the minimum monthly repayment of £78 (3%). Their interest accrues monthly on what they don’t pay off, and at that rate, it will take at least two years and nine months to pay off.
The total interest paid to the credit card company will be £721.50 – nearly 28% of the original balance (if repaid in full).
Suddenly a manageable monthly payment turned into unmanageable debt.
Before you realise it, you have maxed out the first card and will now take out other cards (with more balance transfer fees to pay) to use in a financial emergency.
Should you consider a debt consolidation loan instead?
You could consolidate your credit card debt by taking out a personal or consolidation loan to pay off your credit card balances.
Debt consolidation loans are specific loans that merge all unsecured debts into one (more manageable) loan with one monthly payment.
- lower their interest rate,
- protect their credit rating,
- lower their monthly payments, and
- get out of debt faster.
Examine the interest rate and terms and conditions to ensure you will not be adding to your debt, or repaying it over a much more extended period.
However, there are risks involved.
Should you take out an unsecured loan, always repay the credit card(s) debt and cut up the card(s) so that you are not tempted into using it again.
If you keep spending on the same card you just paid off, you risk increasing your debt level back up to the maximum limit, thus, doubling the original debt.
Debt consolidation is only worthwhile when the monthly payment, interest and repayment terms are less than your current amount.
Alternative credit card debt solutions
Debt consolidation is only one option. There are other credit alternatives to consider first.
If you are deep in financial problems, you are very unlikely to solve them by debt consolidation. Moving debt from one place to another is not the answer unless you cannot afford to repay all your debts.
Before you begin consolidating your credit card debts, consider the following:
- Use your savings first, as the interest rate on savings is less than you would pay on your credit card.
- If you must use a 0% interest-free credit card, then after paying the 3% balance transfer fee, pay more than the minimum payment each month (around 1-3%). Your aim should be to repay as much as the full balance before the higher interest rate kicks in and begins to cripple your finances.
Warning: Never use a balance transfer credit card for purchases. The interest-free rate applies only to balance transfers – there will be an interest rate applied to purchases.
When making the monthly repayments, they will pay the purchase and its subsequent interest off first. This means that you will not be repaying the balance transfer debt at all.
When the term is up, you will be left with the original balance transfer debt to repay at a higher interest rate.
It is best to obtain debt advice from financial experts before considering to consolidate your credit card debt.
Do you have any experience with 0% balance transfer credit cards that you would like to share?
Let me know by leaving a comment below.