Typically consumers select a 0% balance transfer credit card as a means of lowering interest on their debt .There are many drawbacks and often the consumer actually builds more credit card debt by doing this. A balance transfer of 3% is always levied from these cards. For example a £5000 transfer means you will be charged £150. You don't have to pay the fee up front - it can be added to the balance. However, this only adds to your debt and gives another opportunity to accumulate more credit card debt.
If you go over your credit limit, miss a payment, pay it late, send a bounced cheque or ask for a duplicate statement you could also be charged. Following an investigation by the Office of Fair Trading, these fees have effectively been capped at £12. When you have a premium credit card that offers enhanced rewards or credit limits you will be charged a additional fee of between £100 and £150 a year. Another important thing to look out for with these credit cards is an order of payments policy, known as a “negative payment hierarchy". Meaning when you use credit card for different purposes and unless you clear your balance in full, card providers will put your monthly payment towards repaying transferred balances before purchases and cash withdrawals. You accrue interest at the highest rate on these transactions. It’s structured so that you won't repay the more expensive borrowing until the cheaper debt has been paid off.
For example, Virgin's credit card offers 15-month interest-free period for balance transfers, but purchases is only interest-free for three months. Thereafter you will be charged the typical rate of 15.9%. Transfer your £5000 debt on the credit card and add 3% considering “negative payment hierarchy”. Your monthly repayments would go towards paying off the transferred balance first and once the three-month 0% offer on purchases runs out, that debt will attract interest at 15.9%. Let’s say you spend on the card as well, making purchases costing £1,000. The sum of the debt is now £6150-6300 at the interest rate of 15.9% or £72-85 monthly; in only four months. Any payments made do not apply to the initial £5000; as soon as that three-month 0% period expires you start accruing interest on the purchases unless you can pay off the whole balance.
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