Was a Balance Transfer Credit Card the Right Option?

by : Marcus Henry



For many years now millions of UK credit card customers have enjoyed moving their debt from one interest free credit card to another. To many people this seems a great idea. You can take advantage of a zero percent offers and use this grace period to pay off as much of the balance as possible without any further interest building up.

Those who used this opportunity to clear, or at least reduce, credit card debt played the game well and will now be benefiting from lower monthly credit expenses. Those who took out the same deals but simply used the offers to stop interest accruing and didn't pay off the balance may now find their options becoming much more limited.

In the days of easily available credit banks were keen to provide interest free balance transfer offers to attract new customers. Not to be outdone by the competition pretty soon all credit card companies were offering 0% balance transfer credit cards and the chances of an applicant being accepted were incredibly high.

What came to pass may well have severe impacts on the UK economy for many years to come. Many customers soon realised they could play the system to their advantage. People started to move their debit balance from one interest free offer to the next. Known as "rate tarts" the idea was to move your balance to a new 0% offer whenever the current one expired, thus never allowing interest to build up.

While this offered a great way for people to pay off debts more cheaply many people, whether misguided or misinformed, simply let the debts sit on their credit card.

Seeing how frequently credit card customers were switching many providers soon realised credit card profits diminishing as customers simply took advantage of the interest free period and then left.

As credit card companies exist to make money it is no surprise that changes were only just around the corner. Most providers introduced balance transfer fees that required customers to pay a fee of around two or three percent of the balance they wished to transfer in order to benefit from a 0% introductory offer. This effectively ended the era of interest free balance transfer credit cards as the fee that was charged provided the credit card company with their profit and the customer with an expense.

However these fees were still smaller than paying the typical UK credit card rate of more than 15.9% and customers continued to snap up the offers. Again those who used these deals to pay off their debts made a good choice.

Unfortunately a worryingly high proportion of customers still didn't use the introductory period to reduce their balance. As this group of customers continued to switch frequently fees for balance transfers continued to rise and some providers removed or severely shortened interest free offers.

Then the UK economy was hit by a credit crunch in late 2007, early 2008 plunging the debt industry into chaos. As a result companies became much more reluctant to lend and belt-tightening spread quickly through the financial sector. The days of easy debt were over and 0% balance transfer credit cards almost disappeared.

So, was a balance transfer credit card the right option? Well, if you used the interest free period to reduce your balance and improve your financial outlook then it most definitely was. However, if you simply allowed your debt to stagnate while the 0% period slipped away then definitely not. Sure your debt might not have increased but a great opportunity to massively reduce your debit balance was wasted and now it will be much harder to refinance your debt and the prospect of paying an even higher interest rate is now a very real one.

If you find yourself in the situation of the latter the worst thing you can do is nothing. It is time to face reality, work out the best way to pay off your debts as quickly and cheaply as possible and make sure you actually do it.