What are balance transfer credit cards?
A balance transfer credit card is an ideal way to reduce your credit card debts – as long as you avoid the pitfalls. These cards allow you to transfer debts from existing credit cards to a new provider. To compete for your custom, most credit card providers will provide a generous interest-free period on new balances, giving you plenty of time to reduce your debts or pay them off completely.
What balance transfer credit card deals can I expect to find?
Most balance transfer cards offer a 0% interest period, some of which last up to 34 months. If you don’t spend on these cards and make your minimum payments on time, you’ll have this entire period to reduce your debts and it will cost you nothing in interest.
Given that the average credit card rate has exceeded 18% in 2014, you could be saving at least £180 a year for every £1,000 of credit card debt.
Some cards will come with interest-free offers on purchases, while the balance transfer fee also varies, depending on the length of the 0% offer.
What to look out for with balance transfer credit cards:
One thing to watch out for with balance transfer cards is the transfer fee. This is a charge of up to 3% of the balance that the new lender will add on for agreeing to take on your debts. The longer the introductory 0% offer, the higher the fee is likely to be. So it’s worth weighing up whether you could benefit from a shorter 0% period with a lower fee.
There is also usually a time limit of around 60 days to complete your transfer to secure the 0% deal.
Another thing to watch out for is the standard interest rate. This is likely to be quite high as it helps to finance the 0% offer on the card. Unless the card includes a 0% offer on purchases, avoid spending on it or you will start accumulating interest at the standard rate. Cash withdrawals incur a much higher rate, so avoid using the card at ATMs.
Credit card companies require a minimum payment every month when there is a balance owing, even if you are not being charged interest on it. If you fail to make this payment, you could face charges on your account. The lender could also withdraw any remaining 0% deal.
Make sure you read the documentation when applying for a card to ensure you understand everything.
Is a balance transfer credit card right for me?
Balance transfer credit cards are most suited to those who want to cut the cost of their debt and start paying it off. A good way of ensuring the debt is cleared within the interest-free period is to divide the amount you owe by the number of interest free months.
For example: you transfer a balance of £1,600 to a card that offers 0% for 16 months. The fee for transferring the balance is 3% (£48). If you divide this total (£1,648) by 16 months, you’ll see that you need to repay £103 per month to pay off the whole debt during the interest free period.
Lenders are likely to offer the longest balance transfer deals to those with a good credit history, so check yours before you apply.
But don’t let this put you off. Lenders are motivated by profit as much as risk. Once you get a good deal, don’t slip up and give the lender a reason to penalize you for the full rate.
Play the game, follow the rules, and make the interest-free deal work for you.