A balance transfer offer is a marketing technique that financial institutions use to attract new customers.
Doing a balance transfer can help you to reduce debt and save some money if you make the right choice. So how do you know when to use a balance transfer?
When to use a 0% balance transfer
If you have the discipline to pay back your debt within a fixed time frame, you can use a balance transfer to consolidate debt.
You could also move your balance to a card with better terms, and take advantage of lower interest rates.
When credit card balance transfer isn't a good idea
While transferring your existing credit card balance to a low rate or 0% credit card can help you to get credit card debt paid off faster, it's not always the best thing to do.
Traps to look out for:
Here's when you should consider another option, like a personal loan, to reduce your debt.
1. Annual fee
Even though you might pay 0% interest for the introductory term, check how much the annual fee for your credit card is. You might be better off, in the long run, selecting a credit card with a low-interest rate and no annual fee and making a plan to pay down the balance quickly.
Credit cards with rewards programs are more likely to have annual fees. Other fees to check for include:
- Late payment fees
- Fee for exceeding your credit limit
- International transaction fees
- Cash advance fees
2. Forgetting the 0% end date
The point of transferring your credit card balance is to give you an interest-free breathing space to reduce the total balance. It's important that you have a plan in place to bring you total balance to an amount you can repay each month to avoid paying ongoing interest.
3. Frequent balance transfers
Each balance transfer that you apply for adds another hit to your credit file. To protect your credit rating, you should minimise the number of applications that you make. When you arrange a balance transfer, put a plan in place to reduce the balance before the end of the interest-free period.
4. Balance Transfer Fees
Some credit cards will charge you a fee for the balance transfer. This can be a fixed fee, or it might be proportional to the amount you transfer to the card.
If you aren't careful, your balance transfer and annual fee might end up being more than if you'd kept your balance on the original card and paid interest while paying down your balance.
5. High-interest rate after the introductory offer ends
Often when you transfer a credit card balance, the interest rate on the new credit card will be higher than on your old card, sometimes as high as 20%. If you haven't paid off the balance, you could end up getting deeper into debt.
6. New purchases might attract regular interest rates
A 0% balance transfer offer will often only apply to the amount transferred, not to any new purchases that you make with the credit card. This means that if you use the card for transactions, you will pay back new purchases before repaying the balance transferred.
7. Higher credit card limit
As well as a higher interest rate, a balance transfer card might have a higher credit limit. Make sure that you can afford to repay the monthly balance, and you aren't tempted to spend more just because its available.
A balance transfer isn't a cure for chronic overspending habits.
How to Choose A Balance Transfer Credit Card
If you can find a credit card with:
- 0% interest for more than 12 months
- A low annual fee
AND you are confident that you can repay the balance within the promotional period, then a balance transfer could be a good idea.
Consider the long term consequences of a balance transfer on your finances before applying.
Other options to tackle credit card debt include getting a low rate personal loan to consolidate your debt into one place. This allows you to close your credit card and focus on living within your budgeted income.