Why a balance transfer card is not necessarily right for everyday spending
Balance transfer cards are a great way to manage your credit card debt. Put simply, they offer low rates on money transferred to them from other cards. So if you’ve got bad debts gathering interest on one or more purchasing cards, you can shift those debts onto the balance transfer card, safe in the knowledge that you’ll be paying 0% for a decent length of time. A lot of consumers rely on them, ‘shuffling’ their debt between new balance transfer cards in order to avoid paying lots of interest and to give themselves time to pay the money back. Used cleverly, they can prove to be invaluable, and many people kick themselves for never having used one in the past. As long as your credit score is high enough to get accepted for new cards, there’s no reason why you can’t keep shifting money between credit cards, avoiding have to service the interest on old debts. So balance transfer cards work for moving payments and keeping costs down. But are they good for everyday use? No.
Unfortunately, they aren’t the miracle solution they sometimes come across as. Essentially, they are called balance transfer cards because that is all they are for, and a lot of credit experts will tell you that the golden rule for using them is never spend on them after you have transferred money. It may not seem like it makes much sense, but it does. Basically, the card offers differing interest rates for different transaction types. After you move a sum of money to a card, you are charged 0% interest on that amount, and are obliged to pay it off first. After the designated amount of time the 0% interest rate will end, and if you have kept spending you’ll be obliged to pay what is normally a very high rate on purchases. Debt accrued on the card after the balance transfer keeps accumulating interest until you have paid off the original transfer amount, which can lead to big problems for the borrower. Taking the time to compare credit cards and searching for the best credit cards can make a big difference, as in many cases the disparities between introductory rates and purchasing rates differ from company to company. Take Abbey’s balance transfer card for example. For a 3% fee, Abbey will give you fifteen months 0% on balance transfers. The standard rate, however, is 15.9%. This certainly isn’t the highest you’ll find by any stretch of the imagination, but if you have debt that is effectively locked at that rate for as long as it takes you to pay off your initial balance transfer, then you’re looking at a substantial amount of interest garnered.
So what’s the solution? Well, for starters, don’t use balance transfer cards for purchases. Ever. Although some cards might offer you slightly more favourable rates, it is always better to play it safe. Getting on the wrong side of balance transfer cards can be one of the most expensive ways to trap yourself into debt for a long time. It’s best to simply transfer money to them when you sign up – most application forms will have a clause asking whether you want to move a balance. If not, call the company within two weeks to a month and arrange to do so. Once you’ve paid off the initial balance, put the card in a drawer and forget about it. Don’t be tempted to spend on it. If you need a bit more spending power, search for credit cards with 0% purchase rates and apply for one of those. It’s better to have two credit cards and use them sensibly and profitably than to simply assume that you’re better off with just the one. Bear in mind that card companies will charge different rates of interest for different transaction types, and so cards that are specialised for one form of transaction will often have extortionate rates for others. Purchases, withdrawals and cash back may all carry fees with balance transfer cards, and so it’s best to stick with what the card company are offering up front – a 0% rate for balance transfers.
Using a balance transfer card well can save you a lot of money in the long run. But to get the most out of it you’ve got to take the time to compare all the credit cards on the market and work out which is the best one for you. Some will offer you longer with 0% interest, while others will have different repayment plans. When applying for cards, it’s always worth remembering that banks and credit card companies want your business, and so they are encouraging you to transfer balances. They want your debt, because they will effectively be making money without having to lend any in the first place, meaning there’s no risk involved for them. Take advantage of what they have to offer and play the system to your benefit. As long as your credit score is in a fairly healthy condition you can keep taking out new balance transfer cards and ‘shuffle’ your debt between them indefinitely. It’s normally best to try and transfer a balance about six weeks before a term ends – that way you’ll be able to find out in time whether or not you’ve been accepted for the new card and, if you have, whether your new credit limit is enough to take the whole amount you want to move. If it isn’t, you will (hopefully) have left yourself enough time to look for another card to spread the balance onto. Having two balance transfer cards might not be ideal, but it is certainly better than paying high rates of interest.