One in three borrowers failing to clear balance transfer debts
Many people are taking out balance transfer credit cards but not repaying the debt they owe.
One in three borrowers is not paying off their credit card debt during the interest-free introductory period on their balance transfer credit cards.
The average debt at the end of the 0% period is £2,400 per customer, according to research from Consumer Intelligence.
On top of this one in five borrowers has seen their introductory offer cut because they’ve broken the terms and conditions of the credit card.
Increasing debts
The balance transfer credit card market is fiercely competitive with the top cards offering 0% interest for more than two years.
During the interest-free period borrowers are free to focus on clearing their debts. But new research shows that just over a third (34%) of people aren’t doing that.
In the past two years 44% of the people asked by Consumer Intelligence said they had paid off the entire balance in the 0% period but nearly a quarter (22%) had failed to do so. A further 22% said they hoped to pay it off by the time the 0% period came to an end and 12% said they did not think they would be able to.
As each balance transfer has a fee attached, usually between 1% and 3%, borrowers who aren’t using these cards correctly are unnecessarily wasting money which could be pushing them further into the red.
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Introductory period axed
One in five borrowers who have successfully been accepted for a 0% balance transfer card have seen the introductory offer cut.
The main reason for the 0% period ending early is because people are making a late monthly repayment, which 40% are guilty of. The second reason is missing a monthly payment altogether, which 21% have done.
One in 10 has paid less than the minimum required, 6% have gone over the card’s limit and 23% said they didn’t know why the terms of their card had changed.
Those aged 18-24 are most likely to break the rules on a balance transfer card and subsequently lose the benefits available.
Moving the debt to another card
At the end of the 0% period, over two-thirds of people (67%) said they planned on moving existing debt onto a new 0% card.
This shows a worrying pattern of borrowers using these cards to build up more debt rather than dealing with paying it off.
As there’s no guarantee you’ll be accepted for a new card many people may be left paying off their existing debt with a high interest rate when the 0% period ends.
How to use a balance transfer card
Balance transfer cards have been in the news a lot this year as providers fight it out to launch the longest deal. The market-leader comes from Barclaycard and has a 29-month 0% period. It will cost you a fee of 2.79% of the amount you wish to transfer.
Read The best 0% balance transfer credit cards for more on the top 0% cards.
To make sure you don’t miss a payment, it’s worth setting up a direct debit. You should also work out how much you need to pay each month in order to clear the card by the end of the 0% period.
A credit builder credit card, which is designed for those with a bad credit score, may be a better way to clear your debts. These typically have higher interest rates which are lowered if you meet the monthly payments on time. Over time these cards can help you improve your credit score.
If you’re in real financial trouble a credit card is not going to be the answer. Seeking free and confidential help from a charity such as Step Change is a better idea. It can approach lenders for you and work out a free debt management plan.
Read How the most vulnerable can help themselves out of debt.
Compare 0% balance transfer credit cards
Do you have a balance transfer card? Will it be cleared by the time the 0% period ends? Let me know in the Comments box below.
More on credit cards:
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The best money transfer credit cards
The best cashback credit cards
Why top reward credit cards beat top cashback cards
Top alternatives to Barclaycard balance transfer credit cards
How to build an excellent credit history
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Comments
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You can always transfer the debt to another 0% card when the original one ends and you haven't paid it off. (assuming you are accepted of course), thus you can enjoy another period of very low interest - eg Barclaycard who offer 29 months 0% for a transfer fee of 2.79%. This IS ultra cheap borrowing, as long as you pay off the minimum amount each month - preferably paying off the balance in the 29 months you have got.
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Beware of dirty tricks by your credit card company when clearing multiple balance transfers finishing on different dates and with different terms, e.g. 0% and 6.9%! My Barclaycard had a 0% balance transfer finishing 1st November. A 0% balance transfer finishing 1st January and an on going lifetime balance @ 6.9% Payments were applied as follows:- 25 Oct a part payment towards the November BT @ 0% is applied to the higher lifetime BT @ 6.9% (as would be expected) 3 Nov a payment in excess of the balance transfer finishing 1st November, is also applied to the lifetime balance of 6.9% (contrary to Barclaycard's own T & C's) The balance transfer ending on 1st November is then carried forward in full, at 16.9% to all subsequent statements until it is paid off many many months later (contrary to the published payment hierarchy). TO BE CLEAR:- THE FIRST 0% BALANCE TRANSFER REVERTED TO 16.9% ON 1ST NOVEMBER, WAS PAID IN FULL ON 3rd NOVEMBER, YET REMAINS ON MY SUBSEQUENT STATEMENTS @ 16.9% UNTIL PAID OFF IN FULL A SECOND TIME. This situation has occurred around a dozen times over the past couple of years. Each time I query it, Barclaycard reply with much waffle about payment hierarchy. Eventually, after much persistence on my part, they will admit they have not applied their own terms, say "oops sorry for our error!" and refund the excess interest charged!!!
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Rather than pay the cards off, I invest the money elsewhere (currently in a stock & share ISA). That way, I'll hopefully make well over the balance transfer fee. If I can get a new 0% deal in due course and transfer the balance again I will. If not, I'll just pay off the debt with some of the investment capital. So long as there isn't another stock market crash, it's all good.... I also find that if you accidentally make a late payment, the card companies will agree to keep the 0% deal going if you ring them up, pay what you missed and ask nicely.
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21 December 2013