Effective Use of Credit Card Balance Transfers

Balance transfers were at one time all the rage, and one of the main criteria people used when deciding on a new credit card. First introduced to the UK by Egg towards the end of 2000, a boom was sparked in credit card applications and a new strategy of serial balance transfers was quickly devised by savvy cardholders who found they could avoid interest on their debts by shifting them from card to card, taking advantage of 0% transfer deals.

This practice was hugely popular for the next five years or so, and was costing the card issuers a small fortune in lost interest charges, and so the balance transfer fee was introduced, whereby a fee of between 2% and 3% of the amount transferred was charged, This fee quickly dampened enthusiasm for balance transfers, effectively ending the loophole that allowed free debts. This doesn’t however mean that there’s no point these days in making use of transfer facilities, it just means that a little more care needs to be taken if you’re going to get the best out of them.

The first thing to check is the amount of the balance transfer fee. It’s very difficult indeed nowadays to find a 0% card that doesn’t feature one, although there are tentative signs that this may be changing. It of course makes sense to get the lowest fee possible, although you also need to check if there’s an upper limit to the amount you’ll be charged. For larger balances it my make more sense to have a larger percentage fee with a capped upper limit, rather than a lower percentage with no limit. You need to do the maths.

Next, how long will the 0% rate last? Six months used to be the norm, but now twelve months is increasingly common, with some of the best deals extending to fifteen or even eighteen months. The longer the period, the better. Make sure you take note of when your introductory deal will expire, and give yourself plenty of time to arrange a new 0% card in advance so you can transfer the balance again before interest charges kick in.

Now that you’ve chosen a card and got a great deal, there are a few things to do to make sure you get the best out of it. Firstly, and most importantly, never use your balance transfer card for spending, as the standard rate will likely be not competitive so as to finance the costs of the balance transfer. Also, your repayments will go towards clearing your balance transfer first, leaving your expensive purchases debt sitting untouched, happily building up interest. And, each month, you’ll be charged interest on the interest too, meaning your debt can grow alarmingly quickly.

Also, try to ensure that you never miss a payment or repay late, as not only will you be charged a penalty fee, you might even find that your balance transfer facility is withdrawn, saddling you with interest payments on the debt instead of your nice 0% deal.

Finally, although it’s tempting to use a balance transfer as a sort of ‘holiday’ from your debts, only making the minimum repayments required, the fact that you’re not being charged interest means that any extra repayments you can make are wholly used to reduce your debt, and so a little can go a long way. Try and make use of the opportunity to reduce your debt, even if only by a little, as in the long term debt will always end up costing you – whatever tricks such as balance transfers you can use to postpone that day.