If you’ve had a credit card for any length of time, then chances are that you don’t pay off the balance in full each month. In general, people with credit cards seem to have an unstoppable desire to keep them constantly in the red, with some actually treating their credit card limit as a target!
At first, this is ok, but at interest rates averaging around 15% APR, excluding any potential annual fees, eventually our addiction to credit cards can become a real problem. Most of your monthly repayments may, in fact, be paying off little more than interest and fees. Eventually, you’d love to hit the reset button and start again. That’s where credit cards balance transfers offer a very attractive option.
What are Credit Cards Balance Transfers?
Put simply, it involves one credit card company attempting to attract new customers by allowing them to transfer their existing credit card debt to a new account with them. To entice you over, the tranferred amount is usually subject to a far lower APR, with 0% APR credit cards for at least the first few months becoming increasingly common. And if you shop around, sometimes this rate can last for over a year, and can even apply to purchases too.
Where’s the catch?
Although it certainly sounds tempting, there are a few points to be aware of.
Firstly, your credit cards balance transfers could be enjoying 0% APR, but that doesn’t mean there are no other fees involved. Check the fine print for transfer fees, and compare annual fees with your existing credit card account.
Next, always be aware the the introductory offer will end at some point, so make sure the ‘normal’ APR is competitive, and that you’re not losing any rewards from your existing account that you’ve come to depend on.
Finally, if your credit score is important to you, thread carefully. One of the criteria you’re judged on is the length of credit history, so if you keep transferring balances every few months, it will reduce your score, because your ‘average’ length of credit history will be less than before.
Even more importantly, think twice before closing your old account, unless the annual fees are extortionate. Keeping it open gives you a better debt ratio, which is a large part of your credit score. For example, if you’ve got a $2,000 balance on a $5,000 credit limit card, then transferring to a card with the same limit while keeping your original account open means that you’ve effectively got a $2,000 balance on a potential $10,000 credit limit. To a credit reporting agency, this looks positive, and increases your credit score.
Everybody’s circumstances are different, and credit cards balance transfers won’t suit everyone, but as long as you’re aware of the advantages and potential pitfalls, it can be a very useful facility to take advantage of.