Balance transfer cards are a popular type of card, as their appeal is obvious. For those attracting interest on a credit card, the option to move the money onto a new card is priceless. A card that will not charge any interest on the balance for an introductory offer period that could be up to two years. Naturally this is of course an attractive proposition, saving a borrower hundreds of pounds potentially.
Such cards allow individuals to move debt around, in order to avoid interest charges. Thus, it turns purchases on such cards into the equivalent of interest-free loans. Well almost, as the service is not quite free as will be mentioned below.
But these cards can be very useful. For example, anyone with debts on a store card could be paying an annual percentage rate (APR) of about 30%, or even a good 20% on a standard credit card. A switch to a cheaper balance transfer deal could wipe out this interest instantly for the stated period of time.
Some people take out two separate cards to try and make full use of the credit card offer system. They have one for balance transfers and one for purchases. However, some cards offer great deals and attractive rates on both purchases and balance transfers.
Let’s look at an example to show how these cards but be used. If you paid for a holiday that cost you £3,000, and used a card that charges 0% interest for a year, you could set up a direct debit to pay £250 per month. Thus you could clear the debt just in time for the 0% interest offer to end, thus using the card to loan money at no extra cost.
At the same time, you could switch other debts you have on another card. And, again, so long as you clear the outstanding balance within the 0% period, you will pay no interest.
However, transferring a balance is rarely completely free.
Watch out for fees. The offer of transferring a balance comes at a price – there is usually a “handling fee” of between 3 and 4% in the current market of the amount being transferred, so the key is to work out if the handling fee will be less than the interest you would pay on the balance if it remained on its current credit card. For example, if you were charged 4% to transfer £2000, this would equate to a £80 handling fee. However, if you were paying 20% annual interest on that balance, it would equate to approximately £33 interest per month.
The occasional provider will offer completely free transfers, but will charge an annual fee for the card itself.
You should always read the terms and conditions carefully for any card as deals will differ for balance transfers and purchases – for example, some may offer longer 0% interest periods for one compared to the other.
Whilst most credit cards are free to won, there will be financial penalties if you are late or miss a payment, or breach your credit limit. If you think you are getting into difficulty with debt, seek advice immediately. A number of organisations offer free debt advice, including National Debtline and Step Change.
There are hundreds of credit card offers on the market nowadays. The choice has never been greater, which is excellent news for the consumer. However, such choice can also be confusing.