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A Guide To Balance Transfer Credit Cards

Credit card providers are constantly looking to attract customers to their products. One of the ways to reach their goal effectively is to encourage people to transfer credit card debts to another provider on one of their cards. For this transfer to be worthwhile, a credit card provider may offer a special promotion for balance transfers, such as 0% interest for 180 days.

These offers are often valid for a limited time only, but they are created to encourage people to transfer their balance to a specific institution and stay there after the promotion period.

Cards can be used to pay for your goods and services and can also provide a practical way to pay off other credit claims. This operation is known as balance transfer and some cards have been created specifically for this purpose. It is important for credit card holders to familiarise themselves with the operation of balance transfer and it helps save money when used properly.

A balance transfer involves paying a credit card using another credit card. The initial credit card debt will still exist but the balance will transfer from one card to another. The balance of the old card will be zero while the new card will assume the balance of the old card. In many ways, this approach is some form of debt consolidation or short term loan.

Why Make A Balance Transfer?

The main reason that pushes people to consider a balance transfer is when they already have pre paid credit card debt on a card with a high interest rate. Since some cards offer competitive rates only for a limited time (usually 6 to 12 months), the balance transfer is worth it only when you are able to repay your debt during the promotional period.

Imagine that you have a balance of £6,000 on your credit card with a 9.99 percent rate at credit provider A. Credit provider B offers you 0% interest on your balance for a full year, if you transfer your balance to their card. By making the transfer, you avoid paying interest rates on your debt for an entire year.

Transferring your balance is moving the debt of your credit card from one bank to another that offers you a lower interest rate. Thus you reduce the cost of the debt or the remaining time to pay it. For this reason, performing a balance transfer to credit provider B will save you a significant amount in interest in the first year.

Balance Transfer Fee

Credit card providers generally charge a transfer fee, which typically hovers between 1.00 and 5.00 percent of the amount you transfer. Suppose you transfer £10,000 from your old card to your new card and the new provider charges you 1.00 percent transfer fee.

This means that your new balance will be £10,000 plus £100 (£10,000 x 1.00 percent). Depending on the interest charges you are offered, transfer fees may make the offer less attractive.

Interest charges generally increase after the promotion period. A rather significant disadvantage of balance transfer credit cards is that the competitive interest is applicable for a temporary period. Credit providers attract you with a very low rate, but after a limited period rates can rise to 19.99 percent. If you are used to keeping a card balance, you will not have to use this card after paying off the balance transfer.

If you miss a payment or if you cannot pay the balance that has been transferred in full within the promotional period, you will be charged interest on the entire balance not the balance you have to pay back.

Although sometimes a transfer can help you save money, this is not always the case. This is due a variety of reasons, including:

  • Transfers require fees
  • Interest charges increase following the promotion period (or if you miss a payment)
  • If you make purchases on your transfer before you have fully refunded your previous balance, you will be charged interest on these expenses.
  • Your payments will be applied first on new purchases, at the standard interest rate

It is important to establish how the payments you make affect your balance when you think about the transfer. Suppose you transfer £3,000 from one card to another and then make a purchase of £800 followed by a payment of £800. In this case, the payment of £800 will be applied to your transfer.

Unfortunately, this means that you will be charged the full interest on the new purchases instead of the promotional rate. Additionally, you will be unable to repay this amount as long as there is a transferred to your card. If your interest rate is 19.99 percent, your new purchase will cost you £159.92 in interest during the year if you do not pay it back quickly.

Key Considerations

Credit providers that offer this service often work with fixed interest rates ranging from 7.5 to 24 percent. These rates are low compared to the average effective rate applicable to other customers. You can use online calculators to know how much less you could pay for your debt.

Another advantage of debt transfer is that, in some cases, you reduce the payment terms. As a result, you complete paying your credit earlier than planned and at a lower cost. The third objective of the transfer is to consolidate the debts. This means combining all pending balances of cards in a single plastic. In turn, you have a single debt, repayment period and can lower the interest on your debts in total.

When it comes to lowering the requirements to transfer the debt from one bank to another, the most important requirement to access this service is that you have an excellent credit history. In addition, you should be up to date with your payments on the cards whose balance you wish to transfer.

You also need the new banking institution to approve your card. Once the credit has been approved, you must notify the credit provider that you want to transfer your debt. In turn, the provider will process the transfer upon receiving the request. It is recommended that you first ask the bank about the possibilities.

Using A Balance Transfer Credit Card Smartly

Transfers can be a good idea if you use them properly. Suppose you have made a big purchase and it will take some time to pay it back. A transfer to a card that offers a competitive interest rate can be a good idea.

On the other hand, if you plan to keep a balance even after the end of the promotional period, it would be more advantageous to keep your old card or consider a low interest card.

Transfer Example

john has a card with a £16,000 balance and a 14 percent interest rate. He plans to transfer her balance to a new card. This new card charges 3.00 percent transfer fee and offers a promotional interest rate of 12 months at 0 percent.

After the promotional period the interest rate increases to 20 percent. Suppose Ronald decides to make the transfer and finds it with a balance of £16,000 for 3 years. Has the transfer been worth it?

In the first year, a balance transfer will have been very beneficial for John. Aside from the transfer fee, he would have saved on his interest charges.