A look at a comparison site and you'll see there are many different types of credit card: ones with rewards, credit builder cards, purchase cards and balance transfer cards...
Today we are going to look at balance transfer cards. If you’re not up to speed with balance transfer credit cards, let’s start by defining what a balance transfer card is:
A balance transfer card is specifically designed for you to use to transfer a balance from other credit cards or loans onto it (consolidating your balances into one place). It will usually offer an interest free or discounted interest rate period on those balances. Most balance transfer cards will charge a small fee for making the balance transfer. At the end of the interest free or discounted interest period the interest rate will usually revert to a higher level.
Many balance transfer cards offer an introductory 0% interest rate – in some cases for as long as 30 months or more. But if you have a bad credit history you mightn’t be able to secure a balance transfer card at 0% but you may still be able to find a low interest rate balance transfer card that offers a better rate than your current credit card.
At first glance, balance transfer credit cards can seem like a good idea to avoid paying more interest than you need to, however, there are pitfalls you need to be aware of. And, as with any credit card, there are serious implications if you fail to make your payments.
Fee for transferring
When you take out a balance transfer card you usually have between 30 and 90 days to transfer your debt onto your new card. With most cards you’ll have to pay a fee, which is usually between 2% and 3% of the balance you transfer.
The bigger the balance you transfer the more you will save, by not having to pay interest, so if it’s quite a small amount that you want to transfer then check that the savings will be worth it once you factor in the transfer fee. You’ll also need to check that the amount you want to transfer is within the credit limit of the new card.
It’s really important that once you've transferred the balance you cut off the old cards and don't build up the balances on them again.
Deals don’t last forever
You need to remember that the 0% or low rate deal on the new card will end, the longest these deals usually last is 36 months. The best plan is to commit to a monthly payment that will enable you to clear the whole balance by the time that the interest free or low rate period ends. If you don’t manage to pay the balance off before the deal ends, you’ll have to start paying interest again – and this could be costly.
If you aren’t able to clear the whole balance before the discounted period ends one option might be to apply for another balance transfer card and start the process again. However, it’s worth noting that just because you’ve been able to get one balance transfer card it doesn’t mean that you’ll automatically be able to get another one in the future. Lenders will look at your credit history before making a decision and you mightn’t fit their criteria next time.
Interest on purchases
Whilst your new card may be designed for balance transfers, you can also use it in store and online to make purchases. However, these won’t be at the discounted interest rate and if you aren’t able to clear your balance in full each month you will be charged interest on these.
You must make your payments
As with any credit card, you also need to be vigilant with making your payments. It is important that you pay at least the minimum off each month by the date shown on your statement. If you don’t you may be charged a fee (usually £12) and any late or missed payment will show on your credit history. But, as well as this, you may find that the card provider will cancel your discounted interest rate – which will prove costly.
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