Debt Advice on Consolidation Credit Cards
Introduction
Social and economic factors – not least recession, which the United Kingdom is experiencing for the first time since the early Nineties – mean that debt, and the management of debt, is a fact of life for many British consumers. In fact, at the end of January 2009, the average British household was indebted to the tune of nearly £10,000, excluding mortgage debt. Over 66% of British consumers have at least one credit card, and credit card debt per person, is estimated at over £3,000. With credit card companies typically charging an APR ("Annual Percentage Rate") of between 13% and 19%, it is not difficult to see how some consumers soon find their credit card debts spiralling out of control.
Consolidation Credit Cards
The concept behind a consolidation credit card is simple enough; a borrower with existing credit card commitments, on one or more cards, opens a new credit card account and transfers the balance(s) from the other card(s) to that account. Of course, for this to be effective the new credit card must offer 0% interest – or, at least, a low rate of interest – on balance transfers for a period of time and hopefully, a standard low rate of interest for the lifetime of the debt thereafter. Many credit card providers offer introductory 0% interest rates, for periods of 12 or maybe even 14 or 15 months, as an incentive for new customers to transfer their existing balances. If handled correctly, this type of deal can save a borrower a substantial amount of money – 0% for 16 months on a balance transfer of £3,000 as opposed to 16.8% otherwise, equates to a saving of £480, for example – but prudence and discipline on the part of the borrower are, nevertheless, required.
Anyone considering transferring their existing credit card balance(s) to a 0% or low rate deal should make themselves aware of exactly how long that deal will last and what interest rate they will be charged at the end of the introductory period. Furthermore, they should also be aware that the 0% usually applies to balance transfers, not purchases, and, even then only if repayments are made on time. Fees for late payment or for exceeding a credit limit – or making a purchase during the 0% introductory period – can effectively scupper any 0% deal altogether, and cost hundreds of pounds in additional interest charges.
Credit card providers arrange your credit card debt in order of transaction type – balance transfers, purchases, cash withdrawals – such that you monthly repayment is biased towards paying off the cheaper, lower interest rate, debts first. This effectively means that if you perform a higher interest transaction – a purchase, or worse, a cash withdrawal – that transaction continues to accrue interest until you have repaid the lower interest debt (that is, the balance transfer), in full. Therefore, to reap the benefits of any 0% or low rate introductory offer, you should not spend on the card, at all, during the introductory period.
It is also important to realise that transferring a credit card balance to a low rate introductory deal is only ever a temporary solution. The debt still, ultimately needs to be paid off, and making the minimum repayment each month – which can be as low as 2% of the total outstanding balance, in some cases – may be sufficient to service the interest on your debt, but possibly not even that. In either case, this means that your debt never effectively decreases and you end up saddled with it literally for life. You should therefore try to repay significantly more than the minimum repayment each month.
The success of your application for a consolidation credit card depends, of course, on your credit history. It is important to note, however, that actually applying for numerous credit cards, simultaneously, can have a highly damaging effect on your credit rating, so it is advisable to research the pros and cons of each card, before applying, and apply for one card at a time. If you are in any doubt about your credit report, or score, you can obtain a copy, from one of the credit reference agencies, such as Experian, or Equifax, for a nominal statutory fee. If your credit report contains any erroneous information, or associations, you have the legal right to approach the lender in question and ask for the information to be corrected, or removed. In doing so, you may be able to improve your credit rating and make yourself more attractive in the eyes of consolidation credit card providers.