They are promoted as the best way to clear debts, but nearly half of all balance transfers made on credit cards, a whopping 49 per cent, are not repaid by the end of the 0 per cent interest window.
Most borrowers take an extra five-and-a-half months once the interest-free offer ends to clear the remaining debt, setting them back £104 interest, a report says.
Typically, borrowers shift a negative balance of £1,855 to credit card providers offering 0 per cent interest deals, according to lend-to-save provider, Zopa.
These deals last on average 14 months. But not paying them off in time is costing cardholders a grand total of £443 million in fees.
A blessing or a curse? Credit cards can be a useful tool but only if you avoid the traps and use your card sensibly
The credit card conundrum
The average borrower has £9,513 of unsecured debt, Zopa said, with credit cards making up the largest proportion of that - around one third.
Despite this, 42 per cent of people said they 'never' or 'rarely think' about the money they owe the bank.
Credit cards promising interest-free solutions are constantly appearing in the market. Barclaycard, for example, recently unveiled a 32-month interest-free balance transfer card, which means those who can get the card have almost three years to pay off what they owe without making the situation worse by adding interest on top.
A deal like this sounds too good to be true.
For those who pay it off within the interest-free period it really is a great deal - even once you take fees for transferring a balance into account.
But these offers betray the fact that card companies know customers will not use the cards in the most advantageous way, and enough of them will trip up to make the offers profitable for lenders overall.
So, if you want to make sure you actually profit from a credit card deal you must play by the rules.
As we explain below, card companies advertise eye-catching interest-free periods but only have to accept a fraction of applicants on these terms.
The offers can operate to lure in customers. When their application for the advertised card is unsuccessful, lenders can offer them alternatives with less generous rates, or ones with terms that encourage extra spending.
If you know how to pay the game, it's easy to save money. But a simple slip-up could add hundreds to your bill.
It is easy to advise simply steering clear of credit cards to avoid getting stung. But, as high-profile cases have shown in recent months, having some kind of credit account is necessary you want to successfully apply for a mortgage or loan, for example.
There are a number of common traps that can catch out customers - especially when it comes to balance transfer deals.
Trap 1 - forgetting to switch
Switching your debt from purchase and store cards to interest free balance transfer deals can be a sensible way to repay what you owe more quickly, because the amount is not inflated by further charges.
But one of the easiest mistakes to make is failing to clear debts in time. Balance transfer cards give a set amount of time where no interest is charged on the negative balance moved to the card. But research shows many borrowers fail to do this, incurring hefty interest charges, despite the increasingly generous zero-interest deals available.
CREDIT CARD DEBT TREND
According to the Zopa report, a quarter of people with debts on credit cards and store cards admitted to building up their debt for five years or more, with the average length of built up debt being three years.
On average cardholders expect it to take two years to clear their debts although 1 in 10 people expect it to take five years or longer.
The market-leading deal from Barclaycard offers nearly three years without incurring interest and most of the best-buy deals are not far behind, lasting between 29 and 31 months.
The average cardholder who fails to clear the money is left £1,289 short, and one in seven cardholders who leave debt on a card for more than a year will end up paying £223 in interest charges.
This sum was calculated using the Bank of England as average Quoted Household Interest rates – March 2014. The average rate was 17.3 per cent
If you haven't paid off your debt by the end of the promotional period, switch to another provider offering a similar deal.
Credit Card statistics. Source: Zopa
Trap 2 - missed or late payments
In some instances, customers won't even benefit from the full interest-free offer.
As many as 27 per cent of cardholders lose out on their balance transfer deal before the advertised term is up because they break their contract in some way.
According to Zopa's research, 4.7 million credit and store cardholders have had their 0 per cent balance transfer taken away before it ended because they missed a repayment (9 per cent), paid late (13 per cent) or exceeded their credit limit (8 per cent).
Trap 3 - new purchases
The interest free deal on a balance transfer card usually only applies to existing debt transferred over to your new account.
While many cards have concurrent deals, for example interest-free purchase periods, using a balance transfer card for everyday spending has risks.
Card providers will prioritise any repayments customers make to go towards the most expensive debts first. This is generally a good thing but it may mean that purchases made on a balance transfer card will always need to be cleared first before any cash from repayments can go towards paying down debts.
Trap 2 - building up your debt
Interest-free credit cards can lull people into a false sense of security. For example, if you have a card that doesn't charge interest for two-and-a-half years, it would be easy to build up your debt.
There are two problems with this. Firstly, those that don't switch to another account will have a much larger balance at the end of the promotion period on which to pay interest.
Secondly, even those that do switch might have more of a problem finding a 0 per cent deal which offers a credit limit large enough to transfer the entirety of their larger debt at the end of the term.
Trap 3 - the balance transfer fee
Yes, interest-free balance transfer deals help you to avoid paying interest. But it's easy to forget the the balance transfer fee.
According to Zopa, cardholders paid a whopping £810million in balance transfer fees in the UK last year.
The amount you pay will depend on the size of your balance - the fee tends to be a percentage of the overall amount - and the specific terms of a deal. But the average fee costs 2.5 per cent.
Make sure to shop around for a decent rate, and factor in any extra costs when calculating the savings you hope to make. It could pay to go for a card with a shorter interest-free period if the fee is lower.
Trap 4 - headline rates lure in customers
Remember, the provider only has to offer the advertised interest rate to 51 per cent of successful applicants.
There is no hard and fast rule as each lender will have a slightly different view of what their 'perfect customer' is, but with so much competition for the top deals, it often means those struggling without a spotless credit rating will lose out.
Those who are rejected will often be pointed towards the provider's higher-rate deals or cards with interest-free terms and even if you make it through the acceptance round you might still be offered a worse rate.
But don't dismiss credit card offers out of hand...
Clearly there are a number of marketing traps that hundreds of credit card customers are falling into.
So if you think you might be vulnerable to falling foul of credit card ploys, the best advice would be to steer clear.
BEST 0% BALANCE TRANSFERS
| Provider | Duration* | |
|---|---|---|
| 1 | Barclaycard | 32mnths |
| 2 | Barclaycard | 31mnths |
| 3 | Halifax | 31mnths |
| 4 | MBNA | 30mnths |
| 5 | Tesco Bank | 30mnths |
However, if you are willing to put in the time and effort to stay on top of your bills and finances, balance transfer cards can be useful tool to minimise your debt.
As the Zopa report points out: 'For the 13 million customers who are not on 0 per cent balance transfer deals and have an average debt size of £2,855 on credit cards, it would take just over seven years to repay completely.
'In the process, the customer will have paid £1,336 in interest alone in cases more than the original balance itself.'
A simple lack of knowledge about their cards means just less than half (46 per cent) of credit and store cardholders know how much their card charges for purchases if their bills are not repaid in full.
This means that around 16 million store and credit cardholders don’t know what interest rate their card charges if they don’t pay their bills in full. But a simple call or check of your bill will fill you in.
ead more in source : http://www.dailymail.co.uk/money/cardsloans/article-2627222/Half-balance-transfer-debts-not-cleared-end-free-deal.html#ixzz32bsdHpfp
