Balance transfer credit cards can be a very tempting proposition. They often appear to be a great solution to a persistent debt problem. Carrying a large balance at a high rate of interest on any card can be expensive. Transferring that balance to a credit card that offers a substantially lower interest rate can save hundreds of pounds over a relatively short period of time. However, they are not always the best credit cards to then continue to use everyday.
Balance transfer cards, often offer an incredibly low interest rate on balances transferred onto the card from existing credit cards, sometimes as low as 0%. However, they are not without their pitfalls and you have to be careful of the catches that may make using these cards expensive.
The tempting low interest rate may well be only an introductory rate that applies just for a short length of time. Once this introductory rate has expired, the interest rate often resets to a rate that is substantially higher. It may in fact be an interest rate that is even higher than the average credit card rate. Always read the fine print. Be sure that you fully understand the maximum time that the low teaser rate applies for, and how high the rate will be at the end of that period.
In addition to skyrocketing rates after the initial teaser rate expires,there can be other "gotchas" Make sure that the new low rate also applies to ongoing purchases. All to often they have a separate rate entirely. A much higher rate, that makes the on going use of the card shockingly expensive. It is essential that the terms and conditions are fully understood
Balance transfer cards can still be a great way to speed up the repayment of your balances. For example if you are carrying a 2000 balance on your existing credit card and the interest rate is around the national average, say 17%, It will cost you 340 over a year just in interest. If you transfer to a Zero rate card, all that interest can now be applied to reduce your capital and allow you to reduce your debt much faster.
It is essential that you realize that the interest rate is only a part of the true cost of a balance transfer. In addition, make sure you are aware of any annual fee that is attached to the card. These fees can be in excess of 100. Also make sure you fully understand how the fees are calculated for each balance transfer. Usually a percentage of the amount transferred will be charged when the transfer is made. There is often a maximum charge, making larger transfers make more sense than a number of smaller transfers.
Often there is a minimum fee that will be charged each time you make a balance transfer. This can be in the region of 50 to 75 regardless of how small the amount transferred is. This has the effect of making lots of small transfers a pretty expensive exercise.
To fully understand the cost of your balance transfers you must take into account all of the fees, charges and the interest rate that the transfer will be subject to over the entire time until you reduce your credit card balance to zero.
Balance transfer credit cards often come with "convenient" checks, that make it easy for you to transfer debts other than credit card balances to your new credit card. This is a great way to consolidate debts to allow you to work on an overall debt reduction plan. It may also be tempting to use these checks to pay for rent or major purchases as time goes on, but make sure that you fully understand the terms attached to these checks before you use them. Often they are subject to some hefty fees and may even have their own higher interest rate.
Once you have fully researched all of the balance transfer fees, it is essential that you get to grips with understanding how your ongoing use of the credit card will affect your existing balances and interest rates on this particular card. Some cards will require a minimum number of uses of the card over a billing cycle to keep those low rates active. Make sure you know how many times per month you have to use your card and if there is a minimum amount that you have to spend.
The best approach to maximizing the benefits of your balance transfer card is to spend as little as possible on your card after the initial transfer. There are a couple of main reasons for this. Firstly, the low balance transfer rate doesn't usually apply to new purchases. New purchases are usually subject to a very different, often substantially higher, rate. Secondly, as you make your monthly payments, they will be applied to reduce the balance that has the lowest interest rate first. This is usually your initial transferred balance. The new purchases, with the highest interest rate, will simply sit there accruing interest until all other funds have been cleared. This can turn your cheap low interest or zero interest rate card into an expensive proposition. For example, say you go out to dinner, spend
100 and charge it on your card. If your balance is still there after one year, your meal would have cost you 117. If you take longer to clear your balance, this figure will grow.
There is no doubt careful use of balance transfer cards can be a great way to manage the reduction of your overall debt. However, as with most tools they are most effective when used correctly by someone who understands their use and their limitations. The key is to read and fully understand the terms of the credit card. Dig deep into the fine print to get the full truth on how long interest rates apply, what they apply to and the conditions you have to fulfill to benefit from them. If you have existing balances on high interest cards, transferring them to a low rate card can help you speed up your eventual repayment and drastically reduce the overall cost.