Getting the most out of a balance transfer
Thursday April 2, 2009
A credit card balance transfer is when the credit card user transfers accounts onto their credit card with benefits of low interest, interest-free period or loyalty points.
From a consumer perspective, credit card balance transfers offer the best advantage when you use the process time period repeatedly over several years. In this case the consumer can transfer balances onto new cards that attract 0% rates of interest.
However, caution should be taken with credit card balance transfers, especially with the opening offer time and when the annual percentage interest returns to its normal rate. As a result, consumers may chose to transfer to another card once the introductory period has expired to continue to benefit from low interest.
As an example, if a consumer has an outstanding balance on a credit card with an annual percentage interest rate of 16%, it would be wise to transfer to a new credit card that has a 0% introductory period.
However, there are two important factors to be aware of before you start credit card balance transfers. The first is balance transfer fees and the second is payment hierarchy.
Balance Transfer Fee
Most credit card companies will charge a balance transfer fee in the range of 2.75 and 3% with different credit cards offering different rates.
Any interest free periods less than 6 months may not be beneficial as the total cost of the fee may exceed the total interest that you would have paid over a 3 month period on your original credit card.
Payment Hierarchy
Payment Hierarchy is basically how payments are allocated against your credit card.
With payment hierarchy it is safe to assume that payments will be directed towards the borrowing that attracts the lowest interest rate. As a result, it is ideal for use on balance transfers and not for new purchases. Otherwise, this would mean paying interest immediately on all new purchases until the balance is paid off.
Finally, if you are going to use the balance transfer system than it is important to always make the minimum repayments during the introductory period to avoid losing your special rate and paying interest.
In fact, the safest bet to avoid this happening is to pay using Direct Debit and aim to clear the entire balance by the end of the introductory period, or transfer the balance to a new credit card and start the process again.
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