Balance transfer cards are an ideal tool to pay down debt which has built up on credit cards. If you have a number of card debts you can consolidate them together onto one convenient card which offers an enticing lower interest rate and thus in theory clear your debt at less expense and in a speedier time frame. Those who use balance transfer cards to reduce debt quickly should ideally transfer their balance and then cut up the card to avoid any of the pitfalls they carry.
Unless you know how to avoid the pitfalls of credit card balance transfers you could end up paying far more than you envisaged, and sabotaging your efforts to clear down the balance. So what pitfalls should you look out for?
The low interest rate which is typically from zero percent upwards is for an introductory period only, usually from 6 to 18 months. Once this period expires the card will revert to the variable rate. You should be aware what this new rate will be, and if it is an interest rate you can handle. The introductory rate period can often apply from the moment the card is opened rather than the moment your balance is transferred onto it, thus the introductory interest rate may well end sooner than you have allowed for in your calculations.
It is imperative that all payments are made on time or the low introductory interest rate will be withdrawn as a penalty and be replaced with the higher variable rate or even a penalty interest rate.
Balance transfer cards usually have three active interest rates when they are issued: the initial low offer; the interest rate which new purchases will attract which will be the variable one; and the interest rate applied to cash withdrawals which is inevitably exorbitant. This is the reason why cards should not be used for any other purpose than paying down the balance transferred. If you use the card for additional spending your payments will be allocated to the lowest interest rate balance first, thus your new spending will accrue interest at the higher rate and not be paid down.
A balance transfer fee is a one off fee to transfer your balance and averages between 3% – 4% on most cards. Make sure that by paying this fee you are still making a saving on the balance transfer. The practice of capping fees at $75 no longer applies on most cards. The fee will be added to your balance but most often it still represents a saving on the debt.
Those who are serious about reducing current debt levels can use balance transfer cards to make significant reductions in outstanding debt but really should destroy the card to remove any chance of using it for anything other than the initial transfer. If the debt will not be paid down by the time the low rate expires it is worth considering becoming a ‘rate tart’ and finding another credit card balance transfer card before the variable rate kicks in.