The True Cost of Balance Transfers
Balance transfers are a great way to consolidate credit card debts into one place, especially when there are many 0% deals available. However, there are hidden costs.
Purchases First?
If cards are used for both purchases and balance transfer, the cheaper interest option is always paid off first. Since this is usually the balance transfer, this means repayments are made against the transfer first, whilst purchases sit and attract their higher rate of interest in the background. The solution is simple; never make purchases on the card used for balance transfers. Use a credit card with a 0% APR purchase option instead.
Switch or Stick
The main choice is between switching cards for the best balance transfer rate every nine month or so, or sticking with a card that offers a ‘life-of-balance’ interest rate. A ‘life-of-balance’ APR will be comparable to a cheap personal loan rate, and allows card holders to pay off their debt without hassle.
For example, the Lloyds TSB Advance card offers 5.5% interest fixed for the life of the balance transfer, with a fee for each individual transfer of 2% (minimum charge £2.50, maximum £50.) Sounds good, but there are a long list of conditions, including:
- Balances must be transferred from non-Lloyds TSB group credit cards or store cards.
- A minimum balance transfer of £100 and even this depends on the credit limit
- All balances must be made within six weeks of opening the card account.
- Applications must be made online.
Remember, DO NOT use the balance transfer card for purchases. (See Purchases First? above.)
Switching, or becoming a Rate Tart
Switching between cards involves assessing the best deals on the market, and applying for a new card before the current deal expires, then transferring old balances straight onto the new card. Credit card companies have now become wise to this ‘rate tart’ behaviour, and some have started to charge for balance transfers. These fees hover at about 2% of each balance transfer, with a minimum charge
However, here is a list of current no fee balance transfer offers:
Unusually, payments are made against the highest interest charge items first, as follows; Cash Advances, Credit Card Cheques, then Purchases and standard rate payments Balance Transfers, and lastly to promotional rate Balance Transfers. This means this card could be used for purchases as well, in theory.
The Hidden Costs
Always make the minimum repayments of balance transfers plus some extra, as this ensures the account retains the special rate. Also, high outstanding debts (even if held in a 0% deal) can affect credit scores, as will multiple credit cards applications within a short period. The credit limit offered on the credit card may also be low.
Perhaps the biggest investment for many card holders wanting to switch between rates will be the time and effort required to research new deals every six months or so. Applications must be made in time to ensure that the new card is available not more than 30 days before the old one expires. This way, 0% balance transfers can take place within the new card’s 30 day transfer limit, and before the old card special rate expires.
Staying On
Once the 0% deal has expired, credit card companies may offer customers the opportunity to transfer other debts at a special rate. Some companies such as Virgin, Abbey, and Egg even offer 0% on these ‘extra’ balance transfers. This allows card holders to avoid the pitfalls of multiple card applications, and possible adverse credit scores activity. However, ensure the existing balance is cleared first to avoid possible adverse payment prioritising.
Related Links
- Quick Balance Transfer Guide
Balance transfers allow card holders to transfer the money they owe to their existing credit card to another, usually at a special rate of interest. The new credit card company pays off the old credit card debt and transfers it to the new card. This article will tell you how to play the game.
- Make Money Using Credit Cards
It may seem odd that a financial product designed to offer credit can actually make users money in the process, but it’s perfectly possible. Here is our definitive guide on how to earn extra money while using credit cards.
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