Last week’s guest post from the lovely Naomi and Ricky went down so well with you all that I thought I’d ask a few other fantastic UK Money Bloggers if they wanted to share a post with us. This week I’m sharing a guest post by Sara Williams, who blogs at Debt Camel about everything to do with debt and credit ratings.
0% balance transfer deals can save you a fortune in interest. If you get one, you can move the balance from your current credit card to the new card you get and then pay no interest for however long the deal lasts – 12 months, 24 months or more.
You still have to make monthly payments to the new card, but as you aren’t being charged interest, all of your payment pays off your debt. When the deal ends, you will start being charged interest again. Unless you get a new deal and move the remaining balance on again. Rinse and repeat!
If you have expensive credit card balances that you want to clear, a 0% balance transfer deal is your best option if you have a good credit rating.
And when you are snowballing to pay off all your debt, getting chunks of it onto 0% can really help!
A magic solution to high credit card interest?
Some people have done this for years.
But it gets to feel like not real money when you aren’t paying interest, so it’s easy to not notice if overall you aren’t paying off your debts. Instead your credit card balances are going up.
Does this matter if it’s at 0%?
It may turn into a problem:
- if you have financial problems and miss a payment to a 0% card, your interest-free deal suddenly ends and you get hit with interest again. At the worst possible time, when you are already struggling.
- when you want a mortgage, you will find the lender thinks this 0% debt is “real debt” and it may make it harder to get the size mortgage you want.
- you may not be able to get a new 0% deal when your current one ends.
It’s that last point I am interested in here.
For two years the deals have got worse… and fewer…
In 2017 the top balance transfer offer was for 43 months. Since then the length of these deals has gradually dropped.
A year ago it was down to 37 months. Last month it had dropped to 32 months.
And now, in March 2019, it has fallen to 29 months.
Those may still sound like a long time, but remember they are the longest on offer. Most people will only get a shorter deal.
At the same time, the fees for the deals have gradually gone up. Not a lot, but you will now often pay more to get a shorter deal than a year ago.
And there are simply less deals on offer. Many banks have stopped offering them at all, and others only do for short periods.
So putting this all together, the big worry is that now you have to refinance sooner, and if this trend carries on you will be paying more for an even shorter deal.
Why are the deals getting worse?
These deals cost the banks money. They have to borrow themselves to lend to you.
Of course they are hoping that you will mess up, miss a payment and then they can charge you. Or that at the end of the deal you won’t be able to get another one, perhaps because your credit rating isn’t so good.
But banks have only been able to afford good deals because bank interest rates have been so low.
Interest rates are still really low, but the couple of small increases at the end of 2017 and mid 2018 have taken away a lot of the profit banks hope to make on these deals.
Some have responded by charging more and making the deals shorter. Other banks have just stopped offering good deals at all. Being at the top of the “best buy” table now doesn’t look like such a smart move!
In 2018, the Bank of England wrote twice to banks saying it was concerned that these 0% balance transfer deals may be riskier for the banks and generate less profit than they hope, so the Bank may make them hold more capital. That would also make it more expensive for a bank to offer 0% deals.
And then there is Brexit. No-one knows what effect that will have on interest rates and unemployment over the next few years. This uncertainty may be why the deals have suddenly got a lot shorter this month.
What should you do?
There are still some very good deals on offer. So you should try to get the longest 0% balance transfer card you can.
But I think you would be wise to assume that this may be your last really good offer… that you won’t be able to get another one as good in 2021.
So the more you can pay off the balance every month, the better. If you can only halve your balance that will still make your life a lot easier. If you can pay the whole lot off by the time the deal ends, then you have just had an interest free loan.
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