How transfering your balance could help you make big savings on the cost of your credit card spend.
Credit cards provide an incredibly convenient and flexible way for us to borrow money; unfortunately credit card providers are well aware of this and charge us greatly for the privilege.
When you consider that the interest rates charged on most credit cards are 2 to 3 times that which you'd expect to pay on a loan, together with the fact that the longer you leave an outstanding card balance, the more you end up paying (because of compounding interest - basically you end up paying interest on any interest accrued as well as on the outstanding each month) it becomes obvious why it's so difficult to completely repay existing credit card balances and to stay out of the debt spiral.
Thankfully credit card companies are so desperate to draw your custom (and interest repayments!!) away from their competitors that they have come up with an inventive way of enticing you to switch - balance transfers.
In the world of finance loyalty rarely pays so you should make the most of these balance transfer incentives and switch to the credit card company that provides you with the best leg up onto the path towards becoming debt free.
What are balance transfers?
Balance transfers enable you to move existing credit card balances from one card to another, essentially paying off the outstanding on the old card with the credit available on the new card.
While technically you could transfer your balances to a card that charges almost the same rate of interest as you are currently paying, this would be an entirely pointless exercise so to make this worthwhile you should look at the different offers available and consider which is going to best enable you to clear your debts. Many credit cards now offer interest free, 0% balance transfer offers for a number of months as a means of enticing new customers, however low rate life of balance transfer offers are also available.
Why should I transfer my balances?
By transferring your balance to a credit card with a 0% balance transfer offer you will effectively be granted an interest free period during which all of the repayments that you make will go towards the outstanding balance, giving you the opportunity to clear as much as you possibly can.
It goes without saying that you should go for the longest balance transfer offer possible and try to pay off your cards during this time.
If you are unable to clear your credit card balance completely during the interest free period you really have 2 options. You can either move the remaining balance to another card offering an interest free period on balance transfers and continue repaying and moving until the debt is completely cleared. Alternatively you could switch to a credit card that offers a low rate on balance transfers for the life of your balance.
Although 0% is preferable over paying interest, if you have a large balance that you will be unable to pay back within the 12 months or so of the balance transfer offer the latter option could be worth considering as it will provide you with a consistently low rate.
Because more and more people are choosing to take advantage of balance transfer offers and switching cards when they expire, the vast majority of credit card companies have introduced a handling fee which tends to be a percentage of the amount transferred. So, if you are transferring a large amount you may end up paying a substantial cost in handling fees each time you switch as unfortunately fee free balance transfers seem to be a thing of the past.
Additionally its essential that you move your balance before the initial interest free offer period expires or you will be charged interest at the cards standard rate. Its best to apply for a new card 4 to 6 weeks before you need to switch so that you can get everything sorted in plenty of time as credit card applications often take longer than expected.
How can I benefit from balance transfer's
If you switch to a credit card with a period of low or no interest you have the opportunity to pay off a substantial chunk of your balance, however there are several do's and don'ts that you should be aware of.
Do not spend on your balance transfer card; have a completely separate card preferably with a 0% offer on purchases for when you need to shop.
If you continue to spend on your balance transfer card you will be undoing all the good that the 0% offer allows, as the credit card company is likely to put your repayments towards debts that aren't earning them money first (i.e. the transferred balance) leaving the balance from your new purchases to accrue interest at the standard rate which is usually reasonably high.
The only exception to this is if you choose a card that offers 0% on both balance transfers and purchases for the same amount of time as you can transfer both to a new card when the offer expires, or preferably, clear them both!
- Do make sure that you always meet your cards minimum repayments because if you default or make a late payment you'll not only be charged a penalty fee but may also lose the 0% privileges offered and have to go back to paying a standard rate of interest.
- Do cancel your old cards once you have moved your balance as having access to too much credit could impact your credit score even if you're not using it. The same principle applies to not applying for too many cards at any one time, instead it will look better on your credit score if you spread out your applications.
- If you don't get the credit limit you need to transfer all of your debts to one card, you should still move as much of your balance as you possibly can and either apply for another 0% card or focus on paying off as much of the interest accumulating balance on your old card whilst paying the minimum amount on the new interest free balance.
- Do transfer your existing balance as soon as possible because credit card providers often place restrictions on when you can transfer old balances to a new card. These transfer restrictions can be as little as 30 days after the card has been issued so move quickly to avoid mission the transfer window of opportunity.
Compare Credit Cards via money.co.uk
