In the United Kingdom personal debt has soared to around £1.5 trillion and nearly 107,000 people were declared insolvent in England and Wales.
In Scotland increasingly unmanageable levels of personal debt have meant that the number of people declared insolvent has increased by 75 per cent.
It is unsurprising then with these shocking figures that many are looking for ways to reduce debt.
What is a 0% Balance Transfer?
It’s when one credit card repays money owed on other credit or retail store cards.
For example: the money owed on credit card A is £5,000 at 16 % interest and on credit card B the money owed is £3,000 at 18% Interest.
Some credit card companies (let’s call them credit card company C) will offer new customers the chance to move their existing debt (£8,000) to the new card at 0% interest. This 0 % offer usually comes with a time limit attached to it. This can be anything from three months to eighteen months.
A substantial saving can be made over the life of the 0% offer. However there are several pitfalls to be aware of.
If frequent credit applications are made it will have an adverse effect on a person’s credit rating damaging their ability to obtain new credit. So while it’s reasonable to seek out the best offers make sure card applications are spread out.
It is essential that if the 0% offer is for balance transfers only, do not spend on the card, as a higher rate of interest will kick in defeating the purpose of obtaining a new card.
However some cards will also offer a 0% offer on purchases but it may not be for the same length of time as the balance transfer offer. A person looking to pay off a substantial amount may have to repeat the above process several times before their debts are cleared. It can be done, although in the Credit Crunch, financial constraints have made it much more difficult. Be very careful.
Rate for Life Credit Card
An alternative to the time limited balance transfer offer is the Rate for Life offer. For many this is a much less complicated way of transferring a balance from a card with a higher interest rate.
It is quite simply an offer, at a unchanging reduced rate of interest, until the amount transferred is repaid. At the time of writing there are offers ranging from 5.9% to 6.9% from a number of companies. For many, although they are still paying interest, the offer comes with more peace of mind.
Of course there are other things to consider before applying for a Rate for Life card. There may also be a one-off fee, which could be 1%, and higher amounts transferred may mean a slightly higher interest rate being levied.
Other points to look at are: required income levels, a time limit in which to carry out the balance transfer and many card companies will not allow an existing customer to apply for a new card.
Balance transfers can be an excellent way of reducing payments to credit card companies but also can be confusing. It is highly recommend that people considering this seek reliable debt advice before proceeding.