If you’ve had a credit card or two for some time, you’re already familiar with managing short and longer term purchases, and you’re probably trying to keep the balances as low as possible, using the cards with the lowest rates for your longer-term amounts, or better still, paying the balances off in full. But with the best will in the world, it isn’t always possible or convenient to do it.
Unforeseen circumstances, occasional loss of willpower and even emergencies can all contribute to a balance which is larger than you intended and is costing you more than you would like. If the balance on your credit card is building up, and the interest rate is higher than it might be, you could consider a balance transfer credit card. Opening a new credit card account may seem like a strange thing to do, when you’re already facing rising payments on the ones you have. But as long as you consider your options carefully, it can make good financial sense and save you money too.
Balance transfer credit cards were created for people who would like to pay off a credit card balance over more than a month, but are looking for better rates than their current card offers. As with anything which involves your money, it really pays to do your homework. Here are a few tips to help you choose.
Compare offers across all the criteria
Beware of looking at only one way of comparing the many cards on offer. Sometimes a good deal in one area, such as a low interest rate, or a 0% balance transfer offer can be offset somewhere else, by higher fees for instance.
Choose a card which specifically designed to attract balance transfers
Transferring large amounts from one card to another won’t help you unless you have selected an offer specially designed for the purpose.
Be careful of the initial rates
Most balance transfer credit cards will offer you a great deal when you transfer your balance. You need to make sure that the low-interest or 0% balance transfer period is long enough for you to pay off that balance. If it isn’t, you may well pay much higher rates on the remaining amount after the initial term ends. If you aren’t planning to pay off your balance in a relatively short time, it might be better to go for a fixed APR 0 balance transfer credit card which offers a lower rate than you have been paying, but for a much longer time.
Look out for fees
Some cards charge a mandatory annual fee, while others may waive it as part of their introductory offer. Remember to check whether this waiver is permanent or merely for the first year. If you don’t you may have a nasty shock when the first statement of the second year arrives. Remember, card companies will still want to make money from your transfer, even if they aren’t charging interest. Transfer fees can be as much as 5% of the balance to be transferred, so you need to remember to offset this against the interest you’re going to be saving by transferring your balance. And don’t forget, it will be charged in one hit when you sign up for your new card.
Do your sums
Add up the amount of interest you will save over the low or interest-free term. If you’re only offered six, or even three-months interest-free, and the amount is relatively small, you may find that the amount you save doesn’t justify the transfer fees and additional costs.
This one is important. Read the small print which tells you how the card company will apply payments you make. They may charge low, or no interest on the balance you’ve transferred but a much higher rate if you subsequently use the card for purchases. Your payments will be applied to the original transfer first, so if you hit the shops, the higher rate will be charged on more of your outstanding balance.
Maximize your rewards
Cashback, discounts and loyalty points, milestone bonuses and airmiles are great ways to attract us to a balance transfer credit card. But you need to check whether they will be of any real advantage to you. Weigh up the rewards against the more significant points, such as the interest rate, or the interest-free transfer period, and choose rewards which work with your own personal lifestyle and spending habits.
Consider your credit history
Transferring balances onto new cards frequently can adversely affect your credit rating, as can transferring to cards with lower balances, because the amount you owe will then represent a larger percentage of the amount the card issuer is happy to lend you. Additionally, with every card you hold, you are building up valuable history, so repeatedly opening and closing them can also reduce your credit rating. Most importantly, if you are turned down for a credit card, this goes onto your credit record. 0% interest and balance transfer credit card deals are usually only available to those with a reasonable or good credit rating, so it’s better not to apply with bad credit scores, or if you suspect you will be turned down.
So, if your current credit card has a high balance, and you’re working with high interest rates, as long as you have a reasonable credit rating, the low or 0% APR balance transfer deals are a great way to help you pay off your balances quickly and save you money. And both of those things will improve your credit scores, make you feel good, and allow you some more controlled, guilt-free shopping!