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Balance Transfer- is it all a house of cards?

Apr 6, 2011

Unless you have been living on the moon for the last couple of years, it is hardly a secret that the economy is in a mess. There is a common misconception that it is almost exclusively those who have lost their job, or who are on low incomes, that are suffering. In fact, recent research by Experian, the credit reference agency, shows that more and more middle class parents are being pushed into involvency and the average middle class family has lost £,1500 a year as rising living costs outstrip increases in earnings, according to the Government. So hard times are affecting us all, but not necessarily in the same way.

Middle class families have historically had one advantage over those with lower incomes in dealing with financial misfortunes, namely that they are far more likely to be able to use borrowing to finance their lifestyle and commitments but what we have seen over the last couple of years is a change in the pattern of how this is done.

Does this sound familiar? When times were good, loans were cheap and plentiful and this was the most popular way of funding debt, with the banks using vigorous selling (and mis-selling) of payment protection insurance to fund these cheap APR’s. Then this little scheme was rumbled and the loans dried up,  so lots of people had to switch to using credit cards to ensure that they could keep on borrowing. An obvious way to do this was to use 0% balance transfer cards. The problem is that, eventually, the 0% period runs out and you can easily become a balance transfer “tart”, in a cycle of constantly chasing the next offer like a hamster on a wheel.

This can’t go on for ever. Eventually the “house of cards” can collapse and, to quote a colleague who has just been through this, “you are in a world of financial pain”. Earning a decent income is no guarantee that you can avoid getting into difficulty.

So is there light at the end of the tunnel, or is that just another train coming? There are some signs that lending is coming back. Credit card and car finance volumes increased by 3% and 16% respectively in January, compared to the same time last year. Whereas people have been overall paying off debt in recent months, credit card and unsecured debt actually increased by £800m in February, according to the Bank of England. If this doesn’t come soon enough for you, debt management is an option to help escape from  a continued struggle to keep up repayments.

What is your experience of the “house of cards”? We would love to hear about it.

One Response to “Balance Transfer- is it all a house of cards?”

  1. jonL Says:
    Apr 10, 2011 at 6:11 pm

    We sort of did this back to front, we initially battened down the hatches in 2000-1 ready for the recession….only for it to be postponed by dint of epic money creation!
    We later ended up in considerable debt when my wife was on training rate, I was earning not much starting a business …and we had to transfer the kids to a private school (state offering was looking wanting..) , fight a planning application, lost money in a business project….etc..comes in threes…
    Fortunatley I had cultivated quite a large credit facility and managed to run all of this for about 5 years on the cards, balance transfering betwen them on a organised system which, despite not actually having any money, resulted in having good credit rating!

    The main thing that we did was reduce the recurring expenses as much as possible.

    We reduced the electric bill by £100/m by simply buying a gas kettle (1/3 or less cost of heating water.) , we had managed to get onto a 0.5% tracker so when the car packed up (£185/y tax , 30mpg) we borrowed on the £4.5k on the mortgage (£15/m extra on a car tax of £30/y so more or less neutral on purchase…but 45+ to the gallon so saving £50-£100/m on fuel. with this £200/m plus the reduced cost of shopping (down from credit card tesco or Sainsburys $60-70/ to debit card £30-40/m paid down the cards asap.
    The trick with paying down cards is devide the balance with the minimum payment which gives you a number.
    Do this on all the cards and pay the one with the lowest number first…regardless of the actuall interest rate.
    I freed up £50/m to pay down principle by swapping money from a “good” interest rate to a not so good one with a higher number.
    So without any change in income we were £300/m , £3600 over the year better off and able to pay off principle.
    Back to front in as much as we are now debt free when everybody else is just beginning to deal with all this.

    I am pretty sure that if I had told any of my creditors that I was in difficulty I would be bankrupt and probably homeless by now, once they have evidence of injury they will be all over you like a pack of wolves.

    So essentially keep your head and run the household finances like a business with monthly bookeeping and never use any saving on anthing for anything else but paying down debt.

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