Credit Card Balance Transfers: The Basics

Many banks offer the incentive of 0% (or very low) interest for a fixed period on balance transfers when customers take up a new credit card with them. In theory this enables customers to move credit card debt on which they pay a high level of interest to a card where they will, for a period at least, pay no interest. This can be an effective strategy to avoid paying interest for a time, but it is also one that will have to be ‘handled with care’ due to some very real risks associated with it.

One of the most important risks associated with balance transfers is the fact that it can, in many cases, not be sustained in the long run. This is because banks will often take a dim view of customers moving debt from card to card without making a serious attempt to reduce the debt itself. This means that customers who continually do credit transfers will often find it very difficult to do so after a while, meaning that they could be stuck with a rather unattractive credit card that they only chose because of the 0% transfer option.

In extreme cases excessive transferring activity could be passed on to credit rating agencies. This can wreak havoc on a customer’s credit rating, making access to other kinds of credit very difficult.

It is very important to make sure that you actively manage the card into which you made the transfer. The zero rate often comes with all kinds of terms and conditions attached. One of the most important of these is that any late payments will immediately trigger the regular APR.

Before making the decision to transfer your debt to new card it would be a very good idea to make sure just what the low rate that you are being offered applies to. In some cases it will only apply to the transferred balance itself and not to any subsequent purchases. It would obviously be better to find a deal that offers this rate on both the balance and on new purchases.

If the card that you made the transfer to offers different rates on the transfer amount and on subsequent purchases, you will have to keep in mind is that any payments that you make will, in most cases, first be applied to the portion of the debt that is subject to the zero rate. This means that you could end up paying ‘interest on interest’ on the new debt while servicing the transferred amount.

All of the above does not mean that you should avoid transfer arrangements at all costs. They can be very effective in helping you to reduce interest payments while you work on paying off your debts. It can also be a means to consolidate all your credit card debt in one place making its management, and eventual payment, much less complex. The bottom line is that it is a strategy that should be used with care and that should be actively managed, as a simple mistake (like missing a payment) or the lack of a complete understanding of what a particular offer entails, can cost you dearly.

Summary:

• Credit Card Balance Transfers allows you to transfer debt from one credit card to another at a lower rate.
• It is a strategy that should be used with care as it can be quite risky in the long run.
• It is best to find a deal that offers the low rate on both the transfer and on new purchases.
• It a strategy that should be actively managed with a definite purpose in mind.

Credit Card Balance Transfers: The Basics

Many banks offer the incentive of 0% (or very low) interest for a fixed period on balance transfers when customers take up a new credit card with them. In theory this enables customers to move credit card debt on which they pay a high level of interest to a card where they will, for a period at least, pay no interest. This can be an effective strategy to avoid paying interest for a time, but it is also one that will have to be ‘handled with care’ due to some very real risks associated with it.

One of the most important risks associated with balance transfers is the fact that it can, in many cases, not be sustained in the long run. This is because banks will often take a dim view of customers moving debt from card to card without making a serious attempt to reduce the debt itself. This means that customers who continually do credit transfers will often find it very difficult to do so after a while, meaning that they could be stuck with a rather unattractive credit card that they only chose because of the 0% transfer option.

In extreme cases excessive transferring activity could be passed on to credit rating agencies. This can wreak havoc on a customer’s credit rating, making access to other kinds of credit very difficult.

It is very important to make sure that you actively manage the card into which you made the transfer. The zero rate often comes with all kinds of terms and conditions attached. One of the most important of these is that any late payments will immediately trigger the regular APR.

Before making the decision to transfer your debt to new card it would be a very good idea to make sure just what the low rate that you are being offered applies to. In some cases it will only apply to the transferred balance itself and not to any subsequent purchases. It would obviously be better to find a deal that offers this rate on both the balance and on new purchases.

If the card that you made the transfer to offers different rates on the transfer amount and on subsequent purchases, you will have to keep in mind is that any payments that you make will, in most cases, first be applied to the portion of the debt that is subject to the zero rate. This means that you could end up paying ‘interest on interest’ on the new debt while servicing the transferred amount.

All of the above does not mean that you should avoid transfer arrangements at all costs. They can be very effective in helping you to reduce interest payments while you work on paying off your debts. It can also be a means to consolidate all your credit card debt in one place making its management, and eventual payment, much less complex. The bottom line is that it is a strategy that should be used with care and that should be actively managed, as a simple mistake (like missing a payment) or the lack of a complete understanding of what a particular offer entails, can cost you dearly.

Summary:

• Credit Card Balance Transfers allows you to transfer debt from one credit card to another at a lower rate.
• It is a strategy that should be used with care as it can be quite risky in the long run.
• It is best to find a deal that offers the low rate on both the transfer and on new purchases.
• It a strategy that should be actively managed with a definite purpose in mind.