Credit Card Balance Transfers Explained
What is a balance transfer ?
A balance transfer can be explained simply as a balance transfer! When a balance is transferred usually from a credit card, but possible from a bank account or loan to a credit card with a offer interest rate (usually 0%) for a set period. It does not have to be the entire amount. The card receiving the balance will an interest rate for a set term, normally 6 months, but can be 9 months or even a year. Take a look at the current balance transfer deals currently available. This will give you a flavour of the typical kind of deal available.
Should I apply for a balance transfer ?
It is important to remember that a balance transfer does not mean that the debt has gone away. It just means you are not paying interest on it. You will still have to maintain payments.
This may seem obvious but many people do not get this straight in their mind.
The basic criteria for getting a balance transfer is when you regularly have an outstanding balance after making your monthly payments. This is the amount you should look to transfer to another card. This will mean that for the period of the offer you will pay no interest on the balance (provided you make the minimum payments).
You should be very wary of taking up a balance transfer, if your overall debt is increasing. A balance transfer is not a green light to spend more money. The money you save should be used to decrease your debt.
What should I look for in a balance transfer ?
You need to be aware of the following when looking for a balance transfer card
Good things
- Length of offer period.
- Offer Interest Rate.
- The zero or low interest rate charged on the balance.
- Possible transfers from loans and overdrafts.
- On some cards you can transfer from existing loans and overdrafts and still get the offer.
- Cut-off period for the balance transfer offer.
- Hidden Charges on transfers.
- Some banks will charge a handling fee on the balance transfer.
There is usually a cut off point from the account opening when the offer is no longer valid. Be very aware of this otherwise you could end up transferring a balance to a higher rate !!
What about new purchases ?
Unless there is also a 0% interest rate on new purchases then you should avoid making new purchases on a balance transfer card. This is because the banks will look to reduce the balance transfer debt quicker than the new debt. Provided your credit history is reasonable, there is nothing stopping you having several cards for different purposes. A good way is to have a card, which specialises in 0% on new purchases and another card for balance transfers.
What happens when the balance transfer period finishes ?
When the balance transfer offer period finishes the debt will revert to the typical variable APR. The lenders hope at this point that the cardholder will retain the card and some of the debt, so they can then start charging interest and making some money! So take into consideration the low interest rate credit cards. However, there is nothing stopping the disciplined credit card holder from switching to another balance transfer deal and closing the account. The cycle then starts again. Always allow 6 weeks to 8 weeks before the end of the offer period to apply for a new card. This means you can get the balance transferred to the new card before the lender can start charging the higher rate. You have to be organised to do this, but if you are it does work. People who regularly switch balances are know as card tarts.
The Golden Rules
There are three things to look out for with a balance transfer card
- As mentioned previously, the unsuspecting can get caught out when spending on a balance transfer card.
- Maintaining regular payments. If you miss a payment you incur some penalty, so be aware. To be safe set up a direct debit.
- The interest rate applied when the offer period finishes.
Neil Brown is a freelance writer and regular contributor to the credit card sites Choose A Credit Card and Search4 Credit Cards.
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