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How Can Balance Transfers Reduce Your Debt?

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How Can Balance Transfers Help You?

Balance transfers are a really great way to slow down the mounting interest on your debts if when you find a credit card or bank account that allows you to move an outstanding balance from one account to another.

How? Simple. Lots of credit card providers try to entice new customers by offering a period of 0% interest on new accounts for a set period. For example, let’s say you have an outstanding balance on a credit card that is attracting interest of 20% on a balance of £1,000.

You could also apply the same logic to 0% free overdraft to pay off your payday loans and short-term loans too.

If you transfer the £1,000 from your current credit card to the new credit card you will no longer be paying any interest for the interest free period of the new credit card.

You save money on not having to paying interest which you can now use to pay down the outstanding balance.

You also benefit by effectively paying off an entire debt on the original card, this can only be a positive thing for your credit score.

Always keep a look out for credit cards offers with interest free balance transfers.

How Can Balance Transfers Reduce Your Debt?

It is important that you understand the way in which payments are applied to the balance on your credit card.

Say you have a balance of £1,000 on your card with interest of £50. This brings the balance to £1,050

Now you decide to pay £100 towards your balance. The card company will use the £100 to pay off the £50 interest first and then £50 off the balance.

You end up with a balance of £950.

Each month the interest is still being added to the balance, so next month the balance is £990, this time you have £40 interest and you pay another £100.

Again, the credit card company will use the first £40 to pay off the interest and the other £60 to pay off the principle, now you are down to £890

Because the interest is being added each month it will take a long time to repay the entire balance.

Credit card companies ask you to pay the minimum and the minimum is always around the same amount as the interest accumulated over the previous month. You are simply giving money away. This is why it’s important to pay off more than the minimum each month, even if it is an extra £20 more than the minimum is better than nothing. It may take you a long time to repay but at least you will repay the balance at some point.

How To Game The System?

It is simply not enough for you to simply more the balance from one card to another to just let it sit there for the entire term of the 0% period.

Once you transfer the entire balance to the new card you have the plan to pay off the majority of the balance if not all of the balance in the 0% interest period to maximise the benefit.

Recall in the previous example of paying back £100 per month, not all the money went to pay down the balance.

Now when you repay £100 per month, you will bring the balance down to £400. At this point the credit card company will start to charge you interest once again.

It is important that now you have to pay at least £167 each month to clear the entire balance. If you can’t manage the additional £67 then try to get as close to it as possible. You would be surprised how much money you can save by not buying that morning coffee and bringing your own sandwiches to lunch instead.

Once the 6 months are past you will be in the habit of paying off £167. Why not just continue that habit. Open a bank account and continue to put the money away. In 12 months, you’ll have a nice lump sum of £2,000 to look forward to (£2004 to be exact)

In order to make a balance transfer work efficiently for you is to maximise the low or zero interest rate introductory offer.   You need to pay as much as you can each month towards the credit card to defeat the balance.

If at the end of the 6 month you still have £400 for example left over then try and find another credit card you can move the balance over to and repeat until all the balance has been paid off.

Doing this will save you a heap of money in interest charges.  

Credit Card Comparisons

Let’s look at a few credit cards and the offers they have for balance transfers.

Barclaycard:  up to 27 months 0% (19.9% interest after)

This Barclaycard* offers a long 0% period on spending of up to 27 months, though you could be offered fewer 0% months.

You can’t have had a Barclaycard in the last six months.

Sainsbury’s: – up to 26 months 0% (20.9% interest after) 

The Sainsbury’s Bank Purchase card offers a long 0% period and Nectar points on all spending, though you could get a shorter interest-free period. Give your Nectar card number when you apply, and you’ll get 750 bonus

Nectar points worth £3.75 each time you spend £35+ in store or online at Sainsbury’s (excl petrol) in the first two months from receiving the card (max 7,500 points, worth £37.50).

0% spending length: up to 26 months (some will get 22 or 18 months) 
Important: Clear card in full by end of 0% period to avoid interest (always pay at least the monthly minimum repayment or you’ll lose the 0% deal)

Min income: £10,000 
Standard points earned (excl bonus): Two per £1 spent on Sainsbury’s shopping & fuel, one per £5 elsewhere

Representative APR (variable): 20.9% (some will pay up to 28.9%)
Minimum repayment: Greater of 1% of balance plus interest, 2.25% or £5

These are correct at time of writing (2019 August) 

Discipline is vital

You are applying for the credit card to help you pay off your debts.

Do not use the credit card for making purchases or withdrawing cash.

When you look at the various credit cards available check to see that there are no transfer fees.

At the end of the 0% period the credit card company will start charging at the normal rate.

The 0% interest free period may not apply to new purchases. Always check the small print and if you are not sure always ask the provider to make the charges clear.

Debt management agencies are regulated by The Financial Conduct Authority

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk