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Using a Credit Card for Balance Transfers

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in Credit Cards

Many of us are no strangers to the reality of high-interest credit card debt. Unless we can afford to pay off the whole balance with a few substantial payments, most of what we repay on a monthly basis will go to paying off the monthly interest that’s applied, and if we pay the minimum allowed, it can take many years to pay off the balance. Fortunately, there’s a way to improve this depressing situation, which is to apply for one of the many balance transfer credit cards that are on offer.

Balance transfer credit cards are issued by a lender, such as a bank, building society or other financial services provider for the purpose of paying off any outstanding balance on a customer’s existing credit cards with other lenders.

Basically, what this means is that customers then owe their balance to a new lender, but the advantage is that the interest rate will be much lower, or even interest-free for a specified period. For the lender, balance transfer credit cards are a way of attracting new customers. For the customer, they can be a great way of managing credit card debt.

Interest free
Many lenders will offer an interest-free balance transfer for a fixed period, which can be as long as 23 months. This means that all your monthly repayments within that period will go towards reducing the balance. There’s no crippling interest to be paid on top. It’s a great opportunity to get your debt down to zero or to a more manageable level. When the interest-free period is over, the rate will change to their standard rate, which will probably be similar to your existing card’s rate. Even if you don’t manage to clear the debt within the interest-free period, at least you’ll have made a significant reduction in your balance.

Low interest
Another option is the low-interest rate balance transfer card. Instead of paying your present rate, you could be offered a much lower rate. Although it’s still higher than the zero rate, it’s usually for the life of the loan. The low rate remains fixed until the transferred amount been paid off in full.

Fee
Most lenders will charge a fee of around 3 percent for arranging the transfer, which will be added to your balance. In most cases, though, that fee will be quite small compared to the savings that the new zero or low interest rate will bring you over the period of the repayment. Depending on your current rate, how much you owe and how much you can manage to pay monthly, you can work out whether the addition of the fee makes it still worthwhile to transfer the balance.

Avoid using your new card
While paying off your debt, avoid using the card. Only the balance transfer is at the zero or lower interest rate. Purchases are at the lender’s standard rate. The new lender, of course, is hoping that you’ll ignore any such advice and will use your new card to build up a new balance with them from which they can reap the rewards of their standard interest rate for many years to come.

Conditions
Each lender imposes their own conditions. For example, the balance transfer must be made within a certain time, usually a couple of months. Also, if your credit rating is below average, you may be refused or offered a less favourable rate. Shop around for the best deal.

If you’re in the position of paying off an existing credit card balance that never seems to diminish, a balance transfer credit card is well worth considering. If you can resist the temptation to rack up more high-interest debt, it can provide a great opportunity to make your existing credit card debt far more manageable.