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This week I have a fabulous guest post written by Sara Williams.
Sara blogs about debt and credit ratings at Debt Camel. She is a debt adviser and set up the site because she wants to provide answers to common questions people have with as little jargon as possible.
If you are paying a lot of credit card interest, getting a good 0% balance transfer deal can make a huge difference – suddenly all your monthly repayments are actually reducing your debt.
Then it’s easy to relax and think that this debt isn’t important any more – it’s not costing you anything so it doesn’t matter and at the end of the deal, well you can just get another one… But that’s a dangerous plan.
0% balances make you more vulnerable to problems
If you miss a payment to a normal credit card, you get a marker on your credit record – not good but often not a major problem. But if you are on a 0% deal, then a missed payment can also mean you lose the deal so the next month your minimum payment is going to be a lot larger.
So a difficulty one month is then magnified into a much bigger problem going forwards. And with a recent late payment on your credit record, it will be hard to get another 0% balance transfer.
Hard to mortgage or re-mortgage
You may be very comfortable with the low minimum payments you are making. But a mortgage lender though will be thinking about how affordable a mortgage would be if you lose the 0% deal, or if you can’t get another one at the end.
It’s not easy to juggle paying off debts with saving a deposit, but having a large balance on a % credit card is not the solution – it may mean you don’t get the mortgage you want.
Deals may become much harder to get
In 2016 and early 2017, credit card lenders were competing to be at the top of the 0% best buy tables. Every month the leading deals got longer, or had lower fees, or loyalty points added as sweeteners.
But I write a monthly 0% deals round up and I have been watching as things get slowly tighter. The longest deal you could get in May 2017 was a 43 months – that has shrunk now to 37 months and the transfer fees have been going up too.
This is because the Bank of England has raised rates once and looks set to do it once or twice more in the next year. When money is very cheap, offering you a 0% deal doesn’t cost a credit card lender much. But if the lender has to pay more, then 0% deals are likely to carry on getting shorter and more expensive – and some credit card companies may pull out of offering them altogether.
A better solution
It’s not good to get too comfortable with large credit card balances at 0%. If you have other credit card debt you are paying interest on or expensive loans, clearing them should be your priority. But if all your debt is safely parked at 0%, start paying it down.
The way credit cards calculate your monthly payment means that if you only pay the minimum, then the next month that payment will fall slightly. This is “the minimum payment trap” – it may take 10, 15 or even more years to actually clear a balance even if you don’t spend on a card.
A better option is for you to pick a larger repayment amount you can afford – if your minimum is £38, round it up to £50 or even £75 – it’s still less than you would pay if interest was being added. Then set up a standing order to pay that each month. You can always drop it if you have a bad month, you are in control.
The best solution
Even better if you can manage it is to treat the 0% card as an interest free loan. Divide the balance by the number of months left and set up a standing order to repay that amount each month. Then by the end of the deal, your balance will be zero.
The best time to pay off debt is when it is cheap, because it won’t always stay that way.