Debt Free Tristan on 02 Jun 2008 03:57 pm
0% Balance Transfers - Are They Always A Good Idea?
I work as a mortgage broker, and in my time I have come across many clients who, surprise, surprise are in debt. Many of them have a number of credit cards, with maybe a loan in the background and an overdraft. They are usually all living beyond their means, however in some cases it has been because they were studying to better themselves. I am usually asked if I can help by re-mortgaging to reduce the monthly outgoings, at the expense of increasing the time it takes to repay the debt. This is usually a good thing to do, as the money they save on interest, they can use some or all to repay the debts quicker.
In some instances, the client’s have let me know that they’d been doing these 0% balance transfer deals on their credit cards, as they thought it would help them to reduce their debts by paying less interest. What has usually happened is that they have cleared some of the debt a bit quicker, but actually found themselves more stretched because the monthly payments have been bigger. That’s odd, isn’t it?
What most people (and even the so-called experts) fail to check when shifting debt from one card to another is the minimum monthly repayment required for each card. This can vary from 1% to 3% or more of the remaining balance.
So you can see how a balance of £5,000 shifted from a card charging 15% annual interest and requiring 1% of the balance as the minimum monthly payment would only cost £50 per month compared to a 0% annual interest balance transfer card requiring 3% of the balance as a minimum monthly payment would cost £150 a month.
That’s quite a significant difference in outgoings each month, which is ok if the budgets aren’t stretched, but more often than not, they are. Make sure that you check what the minimum monthly repayment is each month before signing up to a new 0% balance transfer card, unless of course, you plan on paying back a lot more than the minimum each month.
