A guide to credit card balance transfers
A credit card balance transfer involves moving what you owe from one card over to a new card, usually with a lower introductory (or temporary) rate on the transferred amount. Because the balance transfer rate is lower, you’re paying less interest during the balance transfer period. And that means more of your credit card repayment is available to go towards what you owe – helping you pay off the balance quicker.
The rate often reverts back to the standard purchase rate at the end of the introductory period, however it may revert back to the cash advance rate (which is usually higher). Be careful to check which of these applies.
The two main reasons for using balance transfers are either to reduce interest payments or consolidate debt. If you have more than one card, you can consolidate these debts into one new card with a balance transfer. However, if you’ve got other debts too (like a personal loan) then a debt consolidation loan might be a better option.
To help you decide, consider how long it’ll take for you to pay off your debts. If it’s short term, then a credit card with a typical low six or 12-month balance transfer rate might work for you. But if you’re thinking your debt will take years to pay off, long after the introductory rate has expired, then a debt consolidation loan might work better; usually because loans have a structured repayment plan for paying them off over one to seven year terms. So you’ll know exactly what you’ll be paying, and how long it will take for you to pay it off.
While you may get a great deal for a short time with a credit card balance transfer, don’t use it as an opportunity to spend more. Rather, use your short-term reprieve to get on top of your repayments and out of the debt cycle. The banks know you’ll be enticed with low balance transfer offers, but if you use the new card for additional purchases too, then you’re stuck on the hamster wheel. So forget about short-term gains and look for the best deal for your overall circumstances.
Keep in mind that every time you apply for credit (like signing up for a new phone or energy contract) it shows on your credit file. Having records on your file isn’t necessarily a bad thing, but the more credit applications you have on your file, the more it might affect your future borrowing plans.
Make sure you also take other costs into account as well; such as annual fees or balance transfer fees.