Credit Card Balance Transfers Explained

Take advantage of Credit Card Balance Transfers to reduce your interest payments; but don't get caught out!

Credit Card companies have been offering balance transfers for some years now, as an incentive to attract new customers. This means that you can transfer a balance from your existing credit card to your new credit card, and get a preferential interest rate.

Typically, a balance transfer credit card offers 0% interest for a period of time, usually ranging between 3 months and 20 months. At the time of writing the Virgin Credit Card offers one of the longest 0% interest balance transfer period at 20 months.

So, if you have a balance sitting on a credit card and you're paying a typical 16% APR, you can usually save yourself a lot of money by transferring the balance to a new credit card that has a 0% introductory period.

So, where's the catch!

There are two key factors that you need to be aware of, before taking advantage of these balance transfer offers. The first is the balance transfer fee and the second is the payment hierarchy.

Balance Transfer Fee

In the early days of balance transfers, life was much simpler. You simply transferred your current credit card balance and there were, usually, no other costs. This has changed over time, and now, probably all credit card companies charge a balance transfer fee. This is usually in the range of 2.75% to 3%. In some cases, there may be a cap on the total fee charged; however, in more and more cases, the fee is charged against the entire balance transferred.

So, consider a credit card that offers 0% interest on balance transfers for 3 months but charges a 3% fee. It is conceivable that the total cost of the fee exceeds the total interest that you would have paid over a 3 month period on your original credit card. In general, we would not recommend transferring balances, where the interest free period is less than 6 months.

Payment Hierarchy

Payment Hierarchy describes how payments are allocated, each time you make a payment against your credit card balance.

Each credit card company will have their own payment hierarchy and this should be published in their small-print.

As a general rule (and there are some exceptions to this), you can assume that any payment that you make against your outstanding balance, will be allocated to the cheapest borrowing first (i.e. the borrowing that attracts the lowest interest rate).

Because of this, we would recommend that a balance transfer credit cards are only used for balance transfers and that they are not used for new purchases.

If you transfer a balance to a credit card and then start making new purchases, your monthly payments will start to be allocated to the transferred balance, and you will immediately start to pay interest on the value of your new purchases, until such time that the entire balance has been paid off.

Some credit cards do offer both an interest free balance transfer period and 0% interest on new purchases period; however, the interest free period on new purchases is usually shorter than that of balance transfers, so we would still recommend that you do not mix your balance transfers with your new purchases.

And finally

You need to make sure that you always make the minimum payment during (and after) the introductory period as, missing just one payment date, will probably mean that the special rate will be withdrawn and you'll find yourself paying interest. It is recommended that you, at least, make the minimum payment using Direct Debit.

You should always endeavour to clear the entire balance at the end of the introductory period, or transfer the balance to a new credit card and start the process again - bearing in mind, all of the points discussed here.

Some credit cards will allow you to transfer balances to your bank current account as well as to other credit cards. This may be useful if you have an overdraft to clear or you want to use the money for a purpose that is not usually available to credit cards. When doing this, you should carefully check the terms and conditions of the transfer.

Read more Credit Card Articles by MyCreditCardGuide.co.uk

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