What everyone should know about balance transfer credit cards

February 12th, 2007 | Credit Cards

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The first question that everyone asks is “how does a balance credit card work?”. Balance transfer credit cards simply pay off the debts owed on other credit or store cards.

For example, if you owed £500 on Credit Card “A” and £200 on a Store Card “B”, you could apply for a Balance Transfer Credit Card “C” and transfer the £700 owed (£500 + £200) to your new credit card, effectively paying off credit card company “A” and store card company “B” and moving al of your debt to new credit card company “C”.

But why would I want to transfer my credit card debt?

Balance transfer credit cards are used to transfer debt onto because the offer incentive periods whereby the money (or credit card debt) that you transfer across will not be charged interest for a certain period of time. So, instead of having your debts sit with credit card “A” and store card “B” who, for the sake of simplicity or charging you 10% interest on those debts, you can move your money to new balance transfer credit card “C” and pay no interest for upto 12 months. Effectively saving you a bundle of money that would otherwise goto paying the interest on your credit card debt.

If I transfer my money onto my new balance transfer credit card, why do I need to keep my old credit card?

Credit card companies make money from credit card debt. That much you should already know. Credit card companies offer these fantastic balance transfer offers because they want your business. Or, more to the point, they want you to use their new credit card over that of their competitors. The reason for this is that most people dont pay off their full balance each month meaning that they spend more than they can repay and so begin to borrow money from the credit card companies. This is when you (the customer), start to loose out.

By transfering your balance onto a new credit card you are doing the smart thing and taking advantage of the credit card companies very generous 0% rate i.e. you are saving money. As soon as you start to spend on that card however, all of these purchases are not protected by the same deal meaning that you could potentially start to pay interest on those debts. What you need to know is that most card companies will now start to use your monthly repayments to pay off the cheaper (0% interest) balance that you transferred, leaving your recent, high interest purchases on the account to fester and to start making them some serious money. Net result: you start to loose money!

How do I tansfer my balance and spend on a credit card without being disadvantaged?

To save money on transferring a balance to a credit card and pay less interest on new purchases you might want to consider using two credit cards. One credit card holds all of your debt, interest free for a prolonged period of time. The other credit card offers a generally low rate or a low rate on new purchases for a prolonged period of time. Using both cards can ensure that you dont get stung with high credit card interest charges.

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