This is when outstanding debt on a number of different cards, is paid off by a new card, which usually has a zero or low interest teaser offer that lasts between 6 and 12 months. This can be very helpful in the sense that you pay no interest on your outstanding debt for a certain amount of time.
Problems with these card offers:
o Transferring debt is often at a fee where interest is included
o Sometimes only transferred debt is at zero or low interest
o Making new purchases are then at a high interest
o Higher interest can result if new purchases are made.
Who should do a balance transfer?
Anyone who is battling to pay off their outstanding debt with various companies and does not want to pay more interest on the outstanding amount.
What to be careful of:
1. The terms and conditions about the credit card. Often the card only offers zero or low interest on balance transfers or new purchases, very rarely both.
2. Spending on that card can be very expensive if the offer does not cover new purchases at zero or low interest.
3. Making a late payment. If this happens, the offer of zero or low interest will fall away and you’ll be paying a rather high interest of about 16%.
4. Usually there is a transfer fee that you will have to pay when you first transfer your balance to the new card. This fee may be capped or uncapped. You don’t want the uncapped version as you can pay a fair amount of money, and this fee is generally at a higher interest as well.
If you are able to manage your card well and you want to swap from one card to another when your zero or low interest duration is up, you can. Just do not swap from one card to another within a few months, because your credit rating may plunge and you won’t get the benefits of these types of offers.
There may even be times where you will need to have 2 new credit cards to do balance transfers if the outstanding debt is not covered by one card.
In some instances if you apply for a specific card to do a balance transfer and you receive the card, but you don’t get approved for the balance transfer, you may still transfer the balance of your outstanding debt to the new card within a few months.
The most important thing when doing a balance transfer is that you understand that you might not be paying less money each month, however it is the interest that will be less and thus you will pay the debt off faster, instead of paying more interest each month.
Should I make new purchases with my new card?
One should not ever make new purchases with these cards. One of the reasons for this is that new purchases may fall under higher interest than the balance transfer. This would mean that you’d be paying off that new purchase at a higher interest, which is what you should be avoiding. The other problem with making new purchases is that you don’t get to choose which debt you want paid off first. It goes according to low interest debt and high interest debt. Obviously the credit card companies will make more money out of you by paying off the low interest debt you have first, and then the high interest debt, which ultimately means that you pay more interest for longer.
Remember don’t make new purchases with your new card, unless you know there is no interest to be paid on the amount. It’s not easy to manage finances easily, but you have to try to be disciplined!