How To Reduce Your Debt Using A Credit Card

Several years ago, if you had suggested that you could use a credit card to reduce your debts you would have carted off to the nearest nuthouse. These days however, with credit card companies offering a variety of special offers to lure in new customers, it’s an accepted and popular method of reducing your debts.

How’s your credit history?

Before the credit crunch set in, it seemed like the only requirement for getting a new credit card was that you were breathing. Credit card companies are a little more cautious nowadays. Generally speaking, you’ll need a pretty clean credit history, i.e. no missed repayments for the last few years, in order to get the best deals on the market.

If you don’t fall into this camp, then attempting to get a balance transfer deal from one of your existing credit card providers is probably your best option. It’s amazing what offers turn up when you threaten to take your business elsewhere.

How much debt do you have?

There are two main ways to reduce your debts with credit cards. The first is to use a 0% balance transfer card (and another one when the introductory offer runs out). The second is to use what’s known as a lifetime balance transfer deal which charges you a low, fixed rate of interest until your entire balance transfer is paid off.

Which option suits you best will depend on how quickly you reckon you can pay your debt. There’s no hard and fast rule here but a good guide is that if it will take you more than two years to pay off your debts, then the second option of a lifetime balance transfer card will probably be more suitable.

There are two factors at play here. First up, switching again and again to succession of different 0% credit cards gets harder and harder each time and can affect your credit rating. Secondly, you don’t really know what sort of offers will be available each time you switch, so there’s no guarantee you’ll be able to get the deal you need, especially if your credit rating has deteriorated in the meantime.

Simply divide the debt you have by 24 and decide whether this is a realistic monthly repayment that you’ll be able to afford. If it is, then you be able to clear your debt in less than two years, and can go the 0% balance transfer route.

The 0% balance transfer option

Balance transfer deals typically vary from 6 months to 15 months, although who’s offering the best deal can change every month or so depending on which credit card companies want to attract new customers. Note that most credit cards have time limit for accepting any 0% balance transfers of between one and three months from when you apply for them.

One thing to watch out is the balance transfer fee. These were introduced a few years ago, starting at 2% with a cap of £50. Since then, 3% has become the typical fee and unfortunately the caps have disappeared. So a £3,000 balance transfer will set you back £90. It’s possible that balance transfer fees could rise even further, although they’ve remained at 3% for some time now

A few 6-month balance transfer deals don’t charge any balance transfer fee so, if you think you can clear your debts this quickly, they can be worth investigating.

It’s more likely that you’ll be after the longest balance transfer deal you can get. It’s difficult to say how much you’ll be able to transfer to any particular card as it depends on the credit card company’s assessment of your personal circumstances and how well you match the type of customer they want to attract.It may be you’ll need to get more than one 0% balance transfer card to cover your entire debt. If you need more than two cards then this is probably a good indication that you need a more long-term and robust solution to your debt problem.

One thing to watch out for with any balance transfer deal is to avoid making any new purchases. Very often the credit card companies will attempt to lure you in with a short-term offer. Don’t fall for this. Any payments you make will be offset against your 0% balance transfer first meaning you’ll rack up interest on your purchases at 15% to 20% a year for the entire period of your balance transfer Some cards even specify a minimum spend in the first few months to force you into this trap. Just avoid these altogether.

The final thing to remember with a balance transfer deal is to assess where you are four to six weeks before the 0% deal runs out. If you need to get another credit card, you don’t want to leave it to the last minute before applying.

The lifetime balance transfer option

If you think your debts will take a little longer to clear, then a lifetime balance transfer deal will suit you better. There are less of these around than they’re used to be, and they are slightly more expensive, but they still offer good value for money compared with other similar forms of borrowing.

You should be able to get a deal with an interest rate of around 5% to 6% a year, so they are cheaper than a personal loan and give you more flexibility to vary the payments you make each month. Some of these cards levy a balance transfer fee as well, so this can make the sums slightly more complicated.

Another difficulty can come from cards that offer a low rate but only for a limited time of two or three years. These can be your best option, if you’re confident that you can pay off the debt within the relevant offer period.

As with 0% balance transfers, the rule about not spending on these credit cards applies. If anything, it’s even more important as it could be a few years before you pay off your debt in full, so you’ll be paying a high rate of interest on your purchases for even longer.

A final point to note is to make sure you never, ever miss a repayment or exceed your credit limit. This can invalidate the entire deal, meaning you’ll be charged interest at a standard rate going back to day one.

Use our credit card comparison centre to find the best card that suits you