Those with credit card debt who are also feeling the pressure of rising energy, fuel and food bills could benefit from the resurgence of balance transfer credit agreements.
Balance transfer credit cards are making a comeback, with the average interest-free period now the longest in four years.
As long as borrowers keep paying and meet the terms, they can use them to pay off their debts without interest, instead of typical credit card interest rates of 25-30%.
The average interest-free balance transfer duration on credit cards rose to 602 days in March, according to Moneyfacts, from 577 days in December.
For those with credit card debt weighing down on them, the costs of exorbitant interest payments can really start to mount.
A balance transfer credit card allows a customer to transfer multiple credit card debts to a new card.
This means they pay interest on one account rather than several, but balance transfer cards also often come with the promise of 0% interest for a set period.
With the cost of living crisis beginning to take hold, increasing numbers of Britons may have been forced to rely on credit to get by.
But high credit card interest rates mean that many will just meet monthly payments rather than fully work on clearing the debt. This is where it can be helpful to switch to a 0% deal and come up with a plan to pay it back.
Almost four in five Britons say they have experienced price hikes since the start of the year, leading households to rack up £4.7billion in debt, according to research from credit broker Credit Karma.
It also found that the rising cost of living prompted one in five Britons to take out credit cards, loans and overdrafts in the past three months.
Some of the biggest increases have been on household energy bills. The price cap for an average household will rise from £1,277 to £1,971 from April 1, and analysts at Cornwall Insight are now predicting a further 47% increase in the price cap from October. This would bring the energy price cap to £2,900.
This could lead to a debt crisis, according to Credit Karma, with four in five people who have borrowed money to counter the rising cost of bills fearing they will not be able to meet repayments.
For borrowers who are struggling to keep up with credit card repayments, a balance transfer card could be part of the solution.
However, they should consider whether they are likely to be accepted for the card before applying, as being turned down or applying too many times could impact their credit score (see “Will you accepted for a credit card with balance transfer” below).
Although the number of balance transfer agreements remains lower than before the pandemic, the 69 currently available are the highest since April 2020.
Fees charged when transferring debt to one of these credit cards are also falling, according to Moneyfacts.
The average balance transfer fee is now 1.95%, up from 2.23% a year ago. This is the lowest average recorded since October 2006, when it was 1.82%.
Balance transfer credit cards can help people manage their finances by allowing them to consolidate debt and save money on existing card balances.
The Money Charity estimates that UK households have an average credit card debt of around £2,112, while Moneyfacts says the average credit card APR now stands at 26.4%.
Using a 0% balance transfer card, the average credit card debt could theoretically be wiped out in a year if £176 was repaid each month with no interest charged.
Paying off the same amount of debt over a 12-month period with an interest rate credit card would cost an additional £302 in interest, based on the average APR.
Rachel Springall, finance expert at Moneyfacts, said: ‘The credit card market has had to adapt to economic uncertainties and, as we mark two years since the first UK lockdown, the latest moves on cards Balance transfer plans are good news for consumers looking to move their interest-free debts.
“The growth in choice is also encouraging as we saw the number of transactions fall to an all-time high in July-August 2020.
“As the cost of living rises, consumers may be tempted to reduce their credit card payments and while this is a great flexible feature to have when needed, it is imperative that borrowers be aware of their debts, any interest-free agreements that may come to an end and swap if they want to avoid incurring interest.
Will you be accepted for a credit card with balance transfer?
Being approved for a balance transfer card is by no means guaranteed.
In theory, those with the best credit scores are the most likely to be approved for a card because they’ll be used to paying off their debts on time.
Those with bad credit are more likely to be rejected or offered less attractive terms, such as a higher interest rate or a shorter interest-free period.
Those who are declined should keep in mind that applying for a number of other balance transfer cards within a short period of time will worsen their credit rating.
Many card providers won’t allow you to transfer balances from another of their own products, so you should identify the best deal for you outside of your existing provider before applying.
Some service providers can only accept your application if you already have a current account with them.
There are other restrictions such as having a minimum income level – usually between £10,000 and £20,000.
To take advantage of the 0% introductory offers, you may need to transfer your balance within a certain time frame.
Most credit card providers increase processing fees after the first 60 or 90 days.
What are the best balance transfer offers?
One provider to make a notable change to its balance transfer offer last month was Sainsbury’s Bank, which increased the interest-free period from one month to 24 months. Subject to eligibility, it is also possible to obtain a 32 month interest free offer.
Santander has also increased its interest-free offer for up to 21 monthsagainst 18 months, on its free offer.
For those looking for the longest interest-free period possible, MBNA 33 Month Balance Transfer Card is the longest trade in the market.
However, it comes with a 2.69% fee, which means borrowers can find cheaper options if they were willing to compromise on the length of the 0% term.
A cheaper alternative could be Virgin Money 28 Month Balance Transfer Agreementwhich comes with a 1% balance transfer fee.
The longest term may not always be the smartest option, especially if a no-fee deal gives you plenty of time to pay off the debt.
The Santander 21 Month Balance Transfer Credit Card also offers a 0% balance transfer period of up to 21 months with no transfer fees.
Is a balance transfer card right for you?
If you’re able to clear your debts in a few months, a balance transfer card may not be the best option.
Balance transfer cards rarely come with additional benefits such as cashback or rewards, for example.
If you’re looking for a credit card that will reward your daily spending or give you points to use for your next flight, for example, you might prefer to read our recent roundup of the best credit cards.
However, for those with significant credit card debt, a balance transfer agreement might be a no-brainer.
You can usually transfer up to 90 or 95% of your new card’s credit limit.
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