Credit Cards & Loans
The pros and cons of balance transfer cards
If you’re considering using balance transfers to manage your finances this year, make sure you understand the pros and cons of doing so.
Pros of balance transfer credit cards
Using 0% balance transfer cards allows consumers to move any outstanding debts from a higher-interest credit card onto a lower interest one. This can be a great way to save money and get out of debt faster.
Although interest-free windows on balance transfer cards are not as high as they once were, you can still benefit from up to 29 months (more than two years) without facing charges. This can provide some much-needed breathing space to clear any debt from big purchases over the festive period, for example, while remaining free of mounting interest.
You can also use balance transfers to help consolidate your credit card debt, leaving fewer credit card repayments to make each month. If your balance transfer card has a high enough credit limit, this can be particularly useful for paying off multiple credit card repayments across several different credit cards.
If you transfer a credit card balance for the right reasons, such as paying off debt, while understanding the fine print, doing the maths, and sticking to a regular repayment plan, then a balance transfer can be an effective tool for quickly removing debt.
Cons of balance transfer credit cards
On the flip side, balance transfers can land consumers into even more debt and a much worse financial situation if they are not used correctly.
Typically, you need a strong credit score to get a low-interest balance transfer rate. Otherwise, you might only be eligible for the regular and much higher interest rate. In this case, it might not save you enough money to be worth the trouble of applying for one.
Balance transfers can also get expensive and hurt your credit score if they’re not managed and maintained correctly. If you don’t weigh up the full cost of transferring your balance against the interest of keeping your balance on your older card, this could end up costing you money in the long run.
Applying for and opening new credit cards can affect your credit score. Should you end up transferring your balance to a different credit card without enough credit, this will cause your score to drop.
Finally, it is important to acknowledge the increased risk of future debt by transferring your balance. With more credit available on a new card, you might curtail your spending on your older credit card or else find yourself in more debt than when you started.
Dos and don’ts of transferring your balance
If you decide to go ahead with a balance transfer, it’s important to know how to use your card and how not to use it. Follow these dos and don’ts as a rule of thumb to get the most out of your balance transfer card:
- Do have a bank account, credit card or mortgage with the brand whose balance transfer card you want before making an application.
- Do compare offers and look for the best deal before making a decision.
- Do make sure you clear all interest off your card before the 0% runs out or risk paying a higher APR.
- Do any balance transfers quickly within the first 60-90 days in order to qualify for the 0% interest.
- Do take advantage of any reward schemes.
- Don’t apply for multiple balance transfer cards at once or it will look bad on your credit report.
- Don’t immediately close older accounts or it will negatively affect your credit score.
- Don’t forget to meet your monthly repayments.
- Don’t spend or withdraw cash on your balance transfer card.
- Don’t exceed your credit limit or risk having your balance transfer card blocked and be charged a penalty fee.
Salman Haqqi is personal finance expert at money.co.uk