The Art Of The Balance Transfer
One financial tool which is extremely underutilised – but can also be incredibly helpful – is the balance transfer credit card.
A balance transfer card allows you to move existing debt that sits on one credit card onto another credit card: essentially, your new credit card pays off your old one, so that you owe the debt to them instead.
Sometimes there’s a fee involved, usually a small percentage of the overall amount being transferred.
Why would I want to do this?
The balance transfer credit card becomes extremely helpful if you’re paying a large amount of interest on your existing card, or if an existing 0% deal is coming to an end.
There are lots of 0% balance transfer cards available, so these can be used to pay off your debt over several months without becoming bogged down by interest. It’s a great way to take back control of your finance if you’re starting to worry about repaying your credit card bill.
Ultimately, you’ll still owe the amount of money. However, by reducing (or ideally, eliminating) the amount of interest that you need to pay, you’re buying yourself time to pay that money back before the debt spirals.
This can be particularly helpful if you’ve racked up a large balance on your credit card and are now struggling to make a dent in the repayments.
What should I watch out for?
Balance transfer credit cards are a great tool when you use them to get out of debt. They can become dangerous if you use them to start creating more debt.
Using a credit card isn’t always a bad idea, but if you already have a high balance on an existing credit card then transferring it so that you can continue to borrow without raising your payments is not a great plan! That’s especially true with these cards, as new purchases are at a higher rate.
So, with that warning in mind, here are some other things to keep in mind:
- You may need a good credit rating. This means that, while they’re effective for keeping in control of your credit cards, they might not help people with problem debt.
- Despite saving money (potentially a lot of money) in the long run, the up-front fee needs to be paid straight away. This is often around 3%, and if you do find lower fees
- The transfer takes a few weeks: until you’re notified that it has gone through, you need to keep up with any payments to your old credit card provider
- Any late payments will almost definitely mean that your 0% deal ends
- Repeatedly opening new credit cards to move your balance could negatively affect your credit score at least in the short term. However, if you’re using the balance transfer as an opportunity to reduce debt, the overall financial impact will be net positive.
So, what’s the verdict?
Opening a new credit card is relatively simple, and transferring your balance is often possible online – making this an easy way to get on top of debt before it starts to take over. We think that this is a good option, so long as you’re cautious.
However, if you think you’ll struggle to make repayments even after making the transfer then it’s time to look for more aggressive debt repayment strategies.
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