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Experiences and advice on personal finance issues. From credit cards over credit scores to mortgages and real estate investing.
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Generated 0:00:53 on Jan 24, 2020
Paying 0% on credit cards and reducing your debt
Credit card jumping (or rate surfing) is becoming more widespread as people struggle to keep on top of the mountains of debt they have amassed. It's called credit card jumping because people jump from card to card, taking advantage of the best deals on offer.
How Credit Card Jumping Works
It works like this. Suppose you pay for your new car, DVD recorder or stereo using your old card. After the interest free period of around 56 days (less on some cards) you will have to pay interest on the outstanding balance. This can range from under 8% to well over 23% depending on the card you have. And most of the money you pay back each month will pay off interest rather than reducing the principal.
Credit card jumping offers a solution. Most card companies offer reduced interest rates to new customers. This can be a long term low interest rate or a 0% interest rate for a period of up to 12 months. This means that during this period credit card customers are reducing the principal when they make repayments. This will help to reduce their overall indebtedness.
Shopping For A 0% Credit Card
To get a 0% card, consumers just need to shop around. They can visit one of the many comparison websites to find the best deal. Many card companies also offer other incentives such as money-off vouchers, cash back rewards and discounted insurance.
The 'jumping' part comes when the 0% offer runs out. Canny consumers will apply for a new card about a month before the old offer runs out. This leaves plenty of time to get the new card and transfer any balances on to it to take advantage of the new offer. Consumers can do this any number of times.
What About My Credit Rating?
The key to keeping a good credit rating is to always pay at least the minimum amount that is listed on the statement. This must also be paid on time and consumers should never exceed their credit limit. It is also important to keep the old cards even after the balance has moved to another card. Old cards show people's credit history and improve their credit rating.
How Companies Protect Against Card Jumpers
When 0% interest offers first appeared, credit card companies did not realise the implications. They lost hundreds of thousands of pounds of potential interest. Now there's a strategy in place to make card jumping less attractive. This is the balance transfer fee.
The balance transfer fee is a new charge imposed by credit card companies whenever consumers transfer a balance to a new card. The rate for this is around 2%. This means that card companies get their money up front. There are still some cards that do not charge a balance transfer fee, so it's worth shopping around while they last. Some also have limits for balance transfer fees, e.g. they will charge 1% up to $75 max. These offers are getting harder and harder to find.
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