Balance Transfer Credit Cards
One of the easiest ways to reduce your monthly credit card interest bill is to use a balance transfer card.
To attract more clients, banks will sometimes offer special promotional rates for credit card balance transfers. The idea is that you will transfer the balances from your high rate cards to this new low rate credit card.
The offer will generally be a special rate for a specified timeframe. For example the offer may be 2.9% for six months, or in some cases you can secure a longer period with a slightly higher rate, for example 4.9% for twelve months.
Benefits of balance transfers
The major benefit of a credit card balance transfer is the reduction in interest that is charged every month.
In some cases the interest saving can be significant.
Say you had two credit cards with a total balance of $10,000 at a typical interest rate of 18%, your monthly interest alone would be $150. If you could transfer this balance to a card with a 2.9% promotional rate your monthly interest charge would drop to around $24.
That’s a monthly saving of $126, and over the six month balance transfer period you could save a whopping $756. If you were to direct that extra money towards reducing the balance, the total interest saving would be even greater.
Traps with balance transfers
Whilst the interest saving on a balance transfer credit card is certainly attractive, there are a few traps to look out for.
Although the promotional rate will generally be very low, these cards can have high rates for further purchases. This isn’t a problem if you don’t use the card, but if you do, you could find yourself being charged plenty of interest on those additional purchases.
Many cards work in a way where any repayments you make are deducted from the balance transfer amount first. The problem here is again with making additional purchases, as these additional purchases can sit on your card for a long time and will be attracting a high rate of interest the whole time.
The high standard interest rates on these cards can also be a problem if you do not clear your balance by the end of the balance transfer period, as your monthly interest charge will suddenly leap up considerably.
You should also check the annual fees on any balance transfer card, as high annual fees can eat into the interest savings.
Using a balance transfer effectively
Although there are a few traps to be mindful of when using a balance transfer credit card, when used properly they can be a very effective way of reducing your credit card debt.
The first step is to choose a balance transfer card that suits your situation. If you have a small balance that you can clear within six months, you will want the lowest interest rate possible. But if you have a balance that could take a year to clear, it may be worth looking for a card with a longer balance transfer period and a slightly higher interest rate.
You should also avoid making any further purchases on your card, as these will attract a much higher rate of interest and could sit on your card for a long time. Ideally you should put the card away for safe keeping and concentrate on clearing the balance.
Having such a low interest rate on your credit card balance is a great opportunity to put a major dent in your debt. A good strategy is to repay the balance before the promotional period ends, then try to not let yourself get into credit card debt again.