Zero Percent balance transfers, loans and the catch

Nov. 22, 2010 - PRLog -- A friend just asked my opinion what I thought about putting the balance of his personal loan on an introductory  zero percent credit card.  He explained me that he was paying 60 pounds interest every month and he was finding it too much. Therefore to cut his interest charges he decided to put his balance on an interest free credit card he just got accepted for with no interest for balance transfers for the first 9  months.

Let me tell you what I think. At the moment he has a fixed term and fixed APR personal loan that he took out less than a year ago with an APR of 8 %. Dave doesn't know how that on a personal loan in most cases the interest is front-loaded. That means that you pay more interest and less of your debt in the beginning and the other way in the end of the term. Therefore you do get a different  amount of balance paid off every month.

Let me illustrate Dave's loan repayments:
Dave took out a personal loan of £7000 over 3 years, 36 months.
His annual interest is 8 percent.
He makes a fixed repayment of £219.35 a month for 36 months.
The total charge for credit is: £7895.76.
So the interest he pays in total is £895.76. over the 3 years.
He makes an average of £24.88 interest payments over the 36 months.


While if he puts the £7000 on a zero percent credit card:
Let's assume he pays back the same amount, 219.35 a month in the first 12 months (interest free)
He clears £2632.20 of the balance in the first 12 months.
When the interest of 19.9% kicks in, he still has £4367.80 to clear.
He makes the repayments of £219.35 for over 25 more months.
He incurs an interest charge of £977.88
So you can see that he actually lost on the interest and did not win anything.

Now, I am trying to explain Dave that this is only the case if he does make the full balance payments. But let's be honest: if you apply for a zero percent credit card, you will not be too keen on making more than the minimum payment, that;s just obvious, and that is what I see people taking on credit do.

So let's see if he only makes the minimum payment each month in the first 12 months:
He makes a payment of 3%, roughly £21 a month barely clearing any balance.
After the 12 months he still has around 6750 of his balance left.
Which means he would get charged £2779 interest
and it would take him 44 more months to clear the balance on the card.

Side notes:
Credit cards are great, but only if you use them the right way. Unfortunately not many card owners are using them the most clever way, and that's why plenty of them get into bad credit.
You can still try to do balance transfer to another zero percent credit card, and have a chance to get accepted. Although lenders are not that stupid anymore: they do not let you clear credit with credit. Chances are you can be rejected and end up paying an outrageous amount of interest over the years. I advise you to be smart with credit, money and financial products, that's why I put this illustration together. Hope you will get it the first time and it will discourage you to take road that leads into bad credit.
Any questions please leave a comment.

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