The Rundown: Weighing Up Balance Transfer Cards
Some things sound good in theory. Like moving all your debt from one place to another with lower interest rates and smaller repayments each month.
Balance transfers can be a good thing. They’re simply the act of moving a debt (usually a credit card) from one account to another. Interest rates of 0% are usually the carrot. If everything goes to plan, it can be a great way to save money and ease financial problems. But, how often does everything go to plan?
Here’re a few things you need to watch out for.
- The great deal you see is not necessarily the great deal you’ll get. Once the new lender pulls your credit report and evaluates your income, they may choose to offer a less generous balance transfer rate. Without a brilliant credit history and score, chances are the too good to be true offer you’ve seen will be, you guessed it – too good to be true.
- Most credit companies charge a transfer fee, usually around 3-5% of the total balance. Work out how quickly you plan on paying off the debt to make sure this fee is less than the amount of interest you’ll pay if you stay put.
- The enticement of a 0% interest rate is usually for a strictly limited time – usually anywhere between 12 and 24 months. Are you going to have your debt paid off in that time? If the answer is no, then you’ll need to prepare for a hike in the annual percentage rate (APR) when the sweet deal is over – sometimes to the maximum level allowed.
- Some 0% offers are deferred interest promotions. This means if you don’t clear your debt by the end of the set term, you could be hit with all of the interest that built up during the promotion, which could be pretty hefty.
- The special deals are nearly always dependent on you making repayments on time and not going over your agreed balance. Breach either and the party’s over and you’ll find yourself back on the high-interest highway.
- The 0% interest rate usually only applies to the debt you’ve transferred. So, use your new credit card for purchases and you’ll accrue interest charges at the going rate. The repayments you make each month are likely to go towards the debt you’ve transferred, not the new purchases, so the balance on those won’t be budging.
On a final note, balance transfers can impact your credit rating.
The longer you’ve had a credit card and handled that account responsibly, the better your credit score. Close the account and open a new one and it could adversely affect your rating. Worth bearing in mind if you’re contemplating applying for a mortgage or a car loan any time soon.