The postman dropped the usual rainforest through the door this morning and after sorting the wheat from the chaff, I was left with my LoveFilm DVD delivery, my PC Pro subscription, a Vision Express money-off voucher and something from Barclaycard.
It’s a bit early for my credit card statement, so I ripped it open wondering what they wanted. Within was a letter and attached, 2 cheques.
The Offer
“Hello Mr Five Pence Piece,
Your Barclaycard is ideal when you need to buy something. We can also help you manage your finances with a 0% balance transfer offer (a 2.5% handling fee applies). Moving balances from your other cards to your Barclaycard could reduce the interest you pay and make managing your money easier.”
Sounds pretty good so far, doesn’t it? No hard sell, and they’re offering to save me money.
“Here’s how it works.
0% interest until March 2010 (a 2.5% handling fee applies). [...] Any outstanding balance after your March 2010 statement will go back to your standard purchase rate of 12.9% p.a.”
Where’s The Catch?
Still struggling to see the catch? Well, based on what is written in the letter and copied above, there isn’t one. Transfer a balance, pay no interest on it until March 2010 for just a 2.5% one off fee. If you manage to pay it off before or by March, then it’s 0%. Have a little bit left after that, they’ll charge you your standard purchasing rate on the remaining balance.
That really could save you money off of other cards, so what’s the problem?
Check the Small Print
Flipping over the letter to the small print on the back, my eyes fell on the ‘Allocation of Payments’ section. Here it is:
Payments you make are applied in the following order:
- Default Charges and interest on Default Charges
- Promotional Balances (if you have more than one promotional balance your transferred balances are paid before promotional purchases, then open ended offers first, then lowest rate first, then oldest offer before newer)
- Interest and other charges
- Standard balance
- Cash balance and Barclaycard cheques (unless there is a promotional rate).
Confused? Don’t worry; that’s the idea.
Picture the Scene
I’m going to use Selina again, my imaginary friend from the Dig Yourself Out of Debt series. I’m sure she won’t mind too much. As we know, she has 2 credit cards; One has a £5,000 balance at 14.9%, and another with a £1,000 balance at 24.9%.
Her new Barclaycard for which she’s just received these cheques didn’t have a promotional rate to begin with, but she had been using it on and off to buy stuff she needs when she runs out of cash towards the end of the month before learning how to be more sensible and start digging herself out.
The purchase rate on her Barclaycard is 6.9% (non-promotional) so carrying a balance wasn’t that big of a deal to her, and her balance currently stands at a not too terrible £500. The minimum payment is just £10 and each month it costs her around £2.50 in interest.
A little knowledge is a dangerous thing. She’s just caught the money saving bug, so decides she’d be far better off by transferring her expensive £1,000 balance (at 24.9%) onto her Barclaycard, and paying it off before March 2010. She writes the cheque, and puts it in the post.
Job done. It cost her £25 to transfer her £1,000 balance (remember that 2.5% ‘handling fee’?) but she is saving £20 every month in interest fees from the old card.
So far, so good.
It’s Behind You!
Seen where this is going yet? Selina rumbles along paying off amounts she can afford each month. Sometimes more than the minimum, but never the maximum amount as she cannot afford anywhere near that. She feels good knowing that she is spending out less money than she was, even if it takes here longer than March 2010 to pay it all off.
But is she really?
The minimum payment hovers around the £70 mark. Sometimes she pays up the minimum, sometimes she stretches that to £100. Here’s the problem: From the list of the way payments are applied above, Selina is currently paying off her balance transfer. This might well be at 0%, but she is still accruing interest on her ‘old’ £500 balance from purchases, and will continue until she pays off every last penny of the balance transfer!
I’m still wondering if a balance transfer cheque (if not paid off in full by the time the promotional rate expires) reverts to the “Cash balance and Barclaycard cheques” section of payment allocation. If they do, then they’ll sting you for even more interest while you then pay off your standard balance – it’s not terribly clear (and isn’t that just the point).
Imagine how much worse this would be if she’d taken a cash advance before doing the transfer. With it’s 3% fee and 28.9% interest rate, she’d accrue interest on that as well as her old £500 balance month in, month out. The only way she could stop paying interest is to stump up £1,500 in one go and pay off the card in full.
Credit Card Companies Are Not Your Friend
Despite the friendly wording of their letters (if you’ve not been naughty at least), they are not your friends. They are businesses, and businesses are out there to do one thing: make lots and lots of profit for themselves and their shareholders.
I may appear to be picking on Barclaycard but rest assured all credit card companies are the same. It’s just they’re the first this year to have sent me any so were timely cannon-fodder.
So what did I do?
Putting Selina back in her room – after all the cheques were mine not hers in reality – what did I do with them? I already have a promotional balance transfer on my card, and no purchases. I don’t have another credit card with a balance that isn’t paid in full every month, so I put them in the shredder.
To truly and safely benefit from this 0% deal, my Barclaycard would have to have a balance of £0.00.
To stay safe and get the most out of your credit card, stick to one promotion at a time, and don’t mix when it comes to purchases and balance transfers. If you have a card you got for a balance transfer, do not spend on it. Do not draw cash out on it. Freeze it in a block of ice and keep it in the freezer if you don’t trust yourself.
One thing is for sure – mixing standard and promotional rates will quickly make you poor and that’s what they want. The more you’re a slave to credit, the more profit they make.
Don’t fall for it.
If you’re free of debt, have a healthy emergency fund, have maxed out your ISAs for this year, have a regular savings plan already running and still have cash to ponder, then Mike over at The Oblivious Investor may have your answer.
