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Dangers of 0% Credit Card Balance Transfers

20th July 2015

Some very good 0% credit card balance transfers are available at the current time. Hot competition between banks has resulted in cards offering up to three years of credit without any interest charges. 

If you’ve got expensive credit card debts, transferring them to a new 0% interest card probably seems like a good idea? You could save yourself some money now and potentially repay the full balance owed much sooner?

The credit ratings agency Moody’s isn’t so sure however. They’re predicting that some households will get into a financial crisis as a result of using these deals. The root concern is that people are switching debts around without seriously going about ever fully repaying them.

At the same time, the low cost of borrowed money is encouraging people to top up their debts further and further. This is likely to be incurred on interest-bearing credit cards initially, adding extra costs to the new debts. Unsecured borrowings in the UK have increased 7% since late 2012 as lenders and borrowers have returned enthusiastically to the credit market. Many of us are getting further into debt at a pace.

If you’re worried about your debts, and are struggling to afford your repayments, will switching some borrowings to a zero per cent credit card help you?

Some people may find that reducing their interest costs means that they can manage their monthly household budget again. To define this specifically – it means they can then cover all of their monthly bills and expenses without using further credit during the month.

Others might find some temporary financial relief from lower credit card bills, but are still relying on using some extra credit to get through to the end of each future month. This is where the serious financial dangers lurk.

Because the sums don’t add up (expenditure remains more than income) the overall amount of money owed increases steadily over time. Further borrowing is inevitable. Even with continued credit card juggling and 0% deals, at some point in the future the debts in total will become unmanageable.

If you’re struggling with your debt repayments, and are thinking about where the next 0% credit card balance transfer is going to come from, you may wish to ask yourself the following questions:

  1. Do I owe more (in total) than the last time I switched my debts around?

  2. Have debt balances built up again on my credit cards which were previously consolidated onto another balance transfer card?

  3. Is there no obvious way to really significantly increase my income or to reduce my monthly household costs?

  4. After I complete this balance transfer, might I still need to use credit next month or the month after to get through to the end of the month?

If you can answer one or more of the above questions with a “yes” a credit card balance transfer could do you more harm than good in the long term. They’re all “red flag” signals that you might be headed towards serious financial problems in the future.

Speaking to a debt adviser might be a better first step. They can fairly quickly analyse your income, expenditure and existing debts. Once that’s done they’ll be able to tell you whether the credit card balance transfer you’re thinking about is likely to help you, or whether it’s more likely to cause you a much bigger financial headache in the future.

Early action and advice makes it likely that you can avoid serious debt measures such as trust deeds or bankruptcy. These types of personal insolvencies are much more likely to occur when financial problems have been left to fester while debt balances increase over time. When debt advisers are approached at any early stage it’s often possible to help people to informally budget better or to look to less damaging repayment solutions such as debt arrangement schemes.    

The key point is that 0% balance transfers on credit cards are not a financial “cure-all”. What’s a great financial deal for some people could easily turn into a financial disaster for others. 

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Wylie & Bisset Grant Thornton

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