Balance Transfers to Surge in New Year

By Emily Gorton Staff Writer 14 January 2010

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KEYBOARDS across the country will be clicking to a new tune in the next few weeks as millions of Brits combat their debts by applying for new balance transfer credit cards although experts are advising caution when using this fairly complex form of credit.

According to a recent study by Santander, a total of 3.2 billion pounds will be transferred to balance transfer credit cards over the first few months of 2010, continuing 2009's trend for paying back unsecured debts.

10% of the population - that's 4.5 million people - are planning on moving existing credit card debts to balance transfer credit cards in the first few months of the year.

The research also revealed that although the total figure transferred in 2009 was a much higher £7 billion, the total number of balance transfers is a third higher so more people are transferring their credit card debts but less money is actually being transferred, with an average of £1140 per transaction.

This trend has been apparent for the last few years and has led some to conclude that Britons are becoming more resilient and knowledgeable in their debt handling.

The Allocation Catch

In perusing the small print of a balance transfer credit card, it becomes clear that most balance transfers could cause significant complications under their allocation of payments clause.

The main problem is that most credit cards will allocate payments to 0% balance transfer offers before other transactions, such as purchases. Since the balance of purchases cannot be paid off before the balance of the transfer is paid off in full, purchases can accumulate a large amount of interest quickly.

The solution seems pretty obvious: only use a balance transfer credit card for balance transfers. However, there are ways of avoiding the allocation catch.

The Virgin credit card, for example, now pays off the most expensive debts first, to help consumers to avoid expensive interest charges.

Other credit cards with 0% rates on both balance transfers and purchases, such as the Egg credit card, require the balance transfer to be paid off in full before any payments can be applied to purchases. This could potentially be very expensive for credit cardholders.

The steps taken by Virgin and other credit card providers such as MBNA to help consumers to avoid accidentally getting into expensive debt makes their 0% balance transfer deals much more appealing.

While the Egg credit card offers an excellent deal for consumers and is a good second choice behind Virgin's mega 0% balance transfer deal these little kinks in the terms and conditions really are what will make the difference for consumers.

Habits across the Country

An interesting diversity of transfer habits across the UK was also revealed.

The south-east is to transfer the highest rates, averaging at £1807 whereas the average transfer in the north-east is a mere £149.

Only 8% will shift their debt onto new credit cards in the north-east, whereas Northern Ireland holds the highest percentage with 34% transferring here.

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