Tuesday 29th July 2008
by Bob Bardsley
Know Your Money Editor
Picture the scene - your credit's been well and truly crunched. The bank's cancelled your overdraft, your fixed-rate mortgage has expired and you don't want to remortgage in an economy of falling house prices. Where is there left to save some money?
While they may not always be the solution to long-term financial troubles, credit cards can actually offer some ways of cutting costs - zero per cent credit card balance transfers being one of these. By arranging a new credit card with an interest-free offer on incoming balances, the total amount owed may be fixed, rather than going up on a month-by-month basis.
Such a technique could be particularly advisable for anyone pushing the limits of their affordability and only able to meet the minimum repayment required on their credit cards each month. Research published in 2002 by the Department of Trade and Industry (DTI) suggested that Britons who were experiencing "financial difficulty" were three times as likely to make no more than the minimum required repayment compared with those on a more secure financial footing.
But with some credit card providers placing the minimum repayment at two or three per cent, rather than the five per cent which has historically been applied, the government department claimed that even the minimum amount was reducing. Six years on, consumers who were on such deals could find they are still paying back what they borrowed then, with the typical card taking more than nine years to clear at five per cent, 18 years at three per cent and 37 years at two per cent, according to figures quoted in the DTI report.
Will a credit card balance transfer help?
Clearly, making more than the minimum repayment each month is likely to speed up the rate at which the balance on a credit card is paid off. But if you have no spare cash, fixing the balance at its current level could be the best option. However, there are some pitfalls to be avoided, as financial services provider Nationwide points out.
The building society warned earlier this year that many consumers are unaware of the order of repayment applied to their credit card account. Each time you pay some of your balance off, this decides which section of your borrowing is reduced. It could be that the area with the highest rate of interest is repaid first, but it could mean that your interest-free balance transfer is prioritised as the first thing to pay back.
What this means is that, over the promotional period - whether it be eight months or 18 months - the section of borrowing which is treated as interest free could be falling in line with however much you pay towards your credit card. Meanwhile, any new purchases could be charged at the headline rate, typically between 15 and 21 per cent, unless these too are covered by an introductory offer.
Jeremy Wood, divisional director at Nationwide, explains that "most providers apply payments to the cheapest debt first making it more expensive for the consumer and more profitable for them". He adds that, unless the account balance is cleared in full by the end of the introductory period, the card can become "unnecessarily costly".
What can I do?
Between all the different offers - interest-free balance transfers, zero per cent on new purchases, cashback and loyalty points - you could probably be forgiven for getting distracted from the headline interest rate on the card. But it is worth bearing in mind that, like with fixed-rate mortgages, the special offers generally come to an end at some point.
Guardian Money has also noted that at least one lender, MBNA, takes steps to keep its own income steady. The credit card provider operates a number of products in the UK, including the Virgin card, with a selection of its customers recently having been informed that they were to be charged nearly 35 per cent on their outstanding balances. A spokesperson told the publication that, offsetting this against the financial services provider's special offers and discount rates, "our average rate is around 15 per cent".
In essence, it would seem wise to compare credit cards from the major lenders and elsewhere to try and find out if there is a product on the market that suits your needs perfectly. If not, there might still be something out there that cuts the level of your repayments or prevents your balance from rising further. Just remember, however, that the small print could reveal factors - such as the order of repayment - that never made it to the headlines of magazine and television advertisements.
©
Before choosing your credit card make sure you read the Know Your Money Credit Card guide.
Search and compare different credit cards and criteria with the
Know Your Money Credit Card Wizard.
