Are balance transfer credit cards a good idea? Well that depends on what you use them for, and how disciplined you are. We take a look at what is a popular product for those that have existing debt, and their pros and cons.
Moving outstanding debt on one credit card to another card—usually a new one—is a balance transfer. Credit card balance transfers are typically used by consumers who want to move the amount they owe to a credit card with a significantly lower promotional interest rate and better benefits, such as a rewards program to earn cash back or points for everyday spending.
Quite simply, these credit cards can save you money. And who doesn’t want to do that? If you use them correctly, they are an excellent tool for reducing the additional costs on your card. By removing interest charges, you can save a huge amount of money. This in turn allows you to pay off what debt you have quicker, as you are not siphoning your earnings away paying interest charges.
What’s more, such cards are a good way of combining multiple debts into one convenient debt, making life much simpler. A single monthly debt repayment makes it easier to ascertain where you are debt-wise, and makes it less likely that you will overlook a payment and fall behind.
The key thing with such cards is to understand fully that moving money from one card to another is never free. There is always a fee for doing so. You should always read in full the terms and conditions on a new credit card before using it in any way. So if you wish to move small amounts of debt onto a balance transfer card, you may not actually save money. This is true also if you are moving debt that you expect to be able to afford to pay off in the near future. If that is the case, the debt will not attract much interest in the future as it won’t exist for long. So always do the maths, and work out if it is worthwhile.
Also note that such offers of zero interest are not lifetime offers. if you move £2000 onto a balance transfer card with 6 months at zero interest, it is only a good move if by the end of the six months you have paid off the £2000. Or at least the vast majority of it. If not, the remaining balance begins to attract what will undoubtedly be high levels of interest. you could of course move the money on again, but that will simply result in another fee.
Always remember though that if you can, it is best to avoid all new forms of credit altogether. This entirely depends on your personal circumstances of course, and some may wish to avoid embarrassing or difficult conversations with those you love. But if that is not an issue to you, then perhaps lending money from friends or family, and agreeing a repayment schedule. This avoids charges or any effect on your credit score. It also allows you much greater flexibility, though you should always try where possible to adhere to a strict repayment holiday. Do not use such an agreement as an excuse to be lax with paying off debt.