Balance Transfer Offers Explained
Balance transfers have been one of the biggest selling points of credit cards in recent years, offering the promise of saving money by reducing or even avoiding interest payments on your credit card debt.
If you’ve not yet taken advantage of the various offers out there, it makes sense to know exactly what the available deals involve.
Introductory 0% Periods
The original and still most common transfer deal is the 0% offer, limited to an introductory period of a few months, often six.
With this kind of offer, once you’ve been approved for a card you have about 6 weeks during which to transfer your balance from another card on to your new one (credit limit permitting, of course).
This clears what you owe on your old card, and for the next six months (or however long the introductory rate lasts for), you won’t have to pay any interest on your debt – in other words, 100% of your repayments will be used to clear your balance. Once the introductory offer period is over, you’ll pay interest at the card’s standard rate.
The large number of cards offering 0% intro deals gave rise to a kind of credit card user known, somewhat unkindly, as the ‘rate tart’ – a serial balance transfer offer user who moves their debt from card to card, always within the 0% periods, and so avoiding paying interest on their debt so long as there are new cards to apply for.
The danger with this scheme is that if you are not disciplined enough to cancel your card accounts once the introductory period has ended and you’ve transferred the balance out, then you can end up with a huge credit line and the temptation to get into heavy debt. And, of course, you need to repay your balance sometime.
Balance Transfer Fees
Partly in response to the loss of earnings from interest credit card companies make because of the ‘rate tart’ phenomenon, an increasing number of balance transfer offers come with a significant string attached – a balance transfer fee.
With this, a percentage of any balance you transfer will be charged to your account by the card issuer. The most common percentage is 2%, and there is normally an upper limit of around £50 – but not always, check the small print carefully if it’s not made clear on promotional materials or the application form.
Low Rate For Life
A variation of the introductory period is the so-called ‘low rate for life’ offer. Similar to the standard balance transfer option, this deal has the advantage that there is no time limit before interest is charged – you’ll be charged interest at the discounted rate for as long as your balance is uncleared.
The downside is that a rate of 0% is rare for this kind of offer, although you’ll normally get a much lower rate than the standard APR of the card. A rate of low-to-middle single figures is generally a decent deal.
Whether this kind of deal makes sense for you depends on whether or not you intend to pay off your balance within a timeframe of a few months, and whether or not you want to get into the game of constantly moving your debt around.
Allocation of payments
One thing to bear in mind with any balance transfer deal is the allocation of payments. Simply put, this means that if you have a transferred balance on your account, and you also use the card for purchases, there will be two different interest rates applied to your balance: the standard purchase rate, and the transfer offer rate. The picture can be even more complicated when you consider the different rates for cash withdrawals or ‘credit card cheques’.
Each repayment you make will not be applied evenly across your account, it will almost invariably be applied first against the ‘cheapest’ part of your balance i.e. your discounted balance transfer.
The upshot is that while you still have a transferred balance that hasn’t been cleared, all your repayments will go towards clearing this, leaving all your purchases and other spending to attract interest at the full rate.
To take the best advantage of a transfer offer, you shouldn’t use the card for anything else until the balance is cleared.
Flat Rate cards
The latest generation of credit cards don’t offer a specific deal on balance transfers, but a fixed low rate across all your borrowing, and are described in a seperate article, Flat Rate Cards Explained.