For many years the credit card balance transfer wars have been raging with offers getting longer and longer.
This has seen the introduction of the ‘Balance transfer fee’ which is a charge made by a credit card company when you transfer a balance to them.
Usually you wouldn’t do this unless there were other benefits and in most cases this would be to take advantage of a lengthy 0% balance transfer period.
Some balance transfers cost money and are not free
Virgin have recently increased their balance transfer offer from 12 to 13 months which is currently the longest offer on the market. In line with the extension of their offer they have also increased the balance transfer fee from 2% to 2.5%.
Doesn’t sound a lot but if you have a balance of £5,000 that’s £25 more you’ll be paying for one more month at 0% than if you were charged 2% for a 12 month balance transfer. So is it worth it?
An approximate calculation using the rate of 15.9%
£5000 x 0.159 = £795 (yearly APR rate)
£795 / 12 = £66.25 (monthly interest fee)
You pay £25 to save being charged £66.25 in interest so still save: £41.25
Transferring multiple balances of cards
In a previous post I mentioned the possibility of being able to strengthen an individual credit score by transferring a credit card balance onto multiple cards. I.e. a £5,000 balance transferred across 5 cards by putting £1000 on each.
This may not be advisable in the UK.
The information I was originally working from was based in the US and discussed something called ‘credit-utilization ratio’ which suggests that if you have lots of credit at your disposal, you’re only using a relatively small amount of it and you’re managing it successfully, you will be regarded as a fairly safe risk when it comes to credit.
This suggests that if you have 5 cards, each with a limit of £5,000 and only have £1,000 balance on each, which leaves you with £20,000 of available credit, you are responsible with your borrowing and credit use. This makes sense; you’re not maxed-out so why should you not be considered for more credit?
Not so in the UK.
It would seem (having spoken directly with Experian on this) that individuals with large amounts of available credit may actually be declined for having ‘too much credit’.
The thinking behind this is if an individual has 5 cards with a £5,000 limit for each and only £1,000 balance on each with £20,000 of available credit, why do they need more?
This research suggests that people may be refused further credit if they’re not making full use of the existing credit available to them.
This seems harsh and unfair because the interest rate on most credit cards (not 0% offers) is much higher than that of a loan. So someone wishing to clear their cards with a lower rate loan could end up being declined by some lenders and be unable to benefit from the best available rates.
A lot depends on available credit
However one argument for this way of thinking that does make sense is that if the person with the available credit of £20,000 went out and spent the lot, they could very well find themselves in dire financial straights and unable to repay.
Some lenders will refuse further credit on this basis because if they were to provide a loan and the borrower then went out and maxed out their cards it is unlikely that the loan would be repaid in a timely fashion.
Of course what determines if an individual is approved for credit is set out by the lender, not the credit reference agency. Credit reference agencies only compile data, it is up to the lender to make a decision based
Can cancelling credit cards affect your credit rating?
I recently read an interesting article on a US finance blog regarding how canceling credit cards may affect your credit rating.
To summarise, the article explained that if you are to cancel a credit card you should cancel the ones with the lowest credit limit.
The reason for this is what you are left with is cards with high credit limits that still have a reasonable amount of available credit instead of low credit limit cards that are maxed out.
Something called ‘credit-utilization ratio’ suggests that if you have lots of credit at your disposal, you’re only using a relatively small amount of it and you’re managing it successfully, you will be regarded as a fairly safe risk when it comes credit.
This logic may also be applied to imply having multiple cards with small balances on them may help to build or strengthen an individual’s credit history.
I’ll be looking into this in the hope to find evidence to suggest it may apply in the UK and if you have any information feel free to comment.
One thing to consider on this matter though is if you have multiple cards; don’t be tempted to start using up the available credit.