In the aftermath of the so-called "credit crunch", with most of the developed world primed for what has been described as the "most painful" recession since the Great Depression of the 1930's, credit card balance transfers are a godsend for anyone dealing with high interest rate credit card debt. The ability to transfer a debt, in its entirety, from one credit card to another, and pay interest at 2%, 1%, or even 0% as opposed to 17.5% on an average standard credit card has helped consumers. Also, the introductory period of 3, 6, or even 12 months at low rates has traditionally led many consumers to seek good deals in the lead up to the Christmas and New Year period as a method of reducing interest repayments. The global financial crisis has put paid to many 0% balance transfer deals, but they are still available, albeit typically in a more restrictive and expensive form than previously. Therefore, consumers need to take note of the "small print" of any balance transfer agreement to which they sign up to ensure that the transfer does actually make solid financial sense.
Balance Transfer Features, Benefits, & Considerations
The principle behind credit card balance transfers is simple. The credit card industry is hugely competitive and in an effort to acquire your business and lure you away from their competitors, credit card companies are willing to offer you a period of grace. During this period, the APR, or "Annual Percentage Rate" applicable to any balance, which you transfer from your previous credit card, is a fraction of what you would otherwise pay indeed, 0%.
The process of physically transferring your balance from one credit card to another is also simple. Whether you apply for a new credit card by telephone, by written application, or online, you will typically be asked for the details of any balance(s) that you wish to transfer to the card. If your application is accepted, the balance(s) on any previous card(s) will be paid off by the new credit card provider and the debt transferred to the new card. If you are not asked this question during the initial application process, it may simply be a question of informing your new provider, typically within two to three months of opening the new account that you wish to perform a balance transfer.
The physical process may be simple enough, but there are one or two pieces of information that you should have at your fingertips before considering any credit card balance transfer. You should, for example, have a clear idea of how long the introductory or "teaser" interest rate is going to last. Obviously, the longer the better and you need to know what APR you will be charged on your outstanding balance after the end of the introductory period. The latter may not be so important if you intend to pay off the debt within the specified period, or if you intend to change to another 0% deal, but circumstances change and you may not be able to obtain another 0% deal when the current deal expires. It often pays to avoid surprises.
Most credit card companies apply a handling fee, typically between 2% and 4% of the amount transferred, to balance transfers, so you may need to factor in such a charge when comparing one deal with another. Other costs may include an annual fee for the credit card itself and charges for late payments and/or exceeding your credit limit, so be careful to ask about these if you are in any doubt. Perhaps more so than anything else, you should ascertain whether the introductory interest rate applies to balance transfers and purchases, or just balance transfers. This is critically important because spending on a credit card where interest is charged on purchases is a surefire way to scupper any benefits derived from transferring a balance in the first place. Balance transfers, purchases, and cash advances are typically subject to different interest rates, with purchases at a significantly higher rate than balance transfers and cash advances worse still. If you engage in either of the higher interest rate transactions, even for a small amount, the way in which a credit card company structures your debt means that the higher interest transaction will continue to accrue interest all the time that you are paying off the lowest interest balance transfer. This is very profitable for the lender who may offer you "cashback" and other incentives to spend on your new credit card, but potentially disastrous for you. Do not be fooled and do not spend on a 0% balance transfer credit card during the introductory period.