Is it better to transfer your credit card balance to a card that offers interest-free deal, or one that promises a low rate until your balance is paid off? We explain how to go about finding the best option for your finances.
If you have debts building up on a credit card that is charging you a high amount of interest, it can be a good idea to look at transferring that balance on to a card that can give you a better deal. Balance transfer credit cards can allow you to do just that.
Two of the options available to you include cards that offers 0% interest for a limited period, and one with a low flat interest rate on your balance.
But which is better for you and your circumstances? We look at the differences and potential suitability of these credit cards.
Why might a lifetime balance transfer card suit me?
The main appeal of this type of credit card deal is that it offers a consistently low, flat interest rate for the lifetime of your balance. This means your outstanding balance will remain on this low fixed rate until it is paid off.
This can be a very attractive option to those with considerable credit card debt, because it means they can spread its repayment over a longer period of time but still benefit from low interest rates. This will ideally suit those who expect to take a year or more to pay off their existing balance.
The interest rates available as part of a life of balance transfer deal are usually lower than the APR offered by standard credit cards, as well as often being cheaper than what you would pay on an unsecured loan.
They can in fact also offer you more flexibility than a loan because you can take as long as you want to pay off the balance. Also, you won't be tied to making fixed repayments or penalised for clearing your balance earlier. Therefore they can present an economical method of paying off your debt in a manageable amount of time.
Transferring your credit balance to a life of balance card also removes the hassle of having to hunt around for another place to move your money when the introductory rate applied to your balance transfer expires. If you know that your balance is guaranteed to remain on the same rate of interest until it is cleared, you can concentrate on paying it off without having to look for another place to move it.
What do I need to be aware of when transferring to a lifetime card?
Although lifetime balance transfer cards can seem like the obvious choice when deciding how best to pay off a credit card debt, it’s important to remember that even though the rates are low, you do still have to pay interest. So it’s crucial that you shop around and find the lowest rate card to make sure you aren’t paying more interest than you have to.
Another important point to remember about these cards is that they should never be used for spending. If you add to the balance on the card with new purchases, those won’t benefit from the low rate of interest but instead will probably be charged at the card’s standard APR (which will be considerably more).
What’s more, because of the negative order of payment applied to the majority of credit card balances, any repayments you make will usually go towards the lowest interest-earning items rather than those that are earning interest at a higher rate.
This is why, if you transfer an existing balance to this kind of credit card, you should put all your efforts into paying off the debt quickly (making more than the minimum payments if you possibly can) and disciplining yourself not to add to that balance by spending any more on the card.
Remember too that some life of balance transfer cards do come with handling fees, and you may be charged around 1-2% of your balance for it to be transferred to its new home.
You should always look into the terms and conditions before signing up so that you know exactly how long you can enjoy the low rate of interest for. Although advertised as ‘life of balance’ rates, this sometimes actually only means 5 years or so. 5 years may be enough for you to pay off the balance, but if you think you’ll still be in debt then, make sure to transfer your balance elsewhere at that point.
How could a 0% balance transfer card benefit me?
Another option available to you is to pay no interest at all on your credit card balance, by transferring your debt to a 0% balance transfer credit card. These offer a more immediately enticing option because your balance, once transferred, won’t accrue any interest – but only for a limited amount of time.
This presents an attractive alternative to the low rates of the lifetime balance card, because you can escape interest payments altogether for a period of a few months or so. And if you are savvy enough to remember to move your balance to a new 0% offer every time your introductory offer ends, you can effectively pay no interest until your balance is paid off altogether.
This will suit those who don’t have huge amounts of credit card debt to pay off. You’ll have to be prepared to move your balance to a new interest-free offer every few months or so, gradually eroding your balance until it disappears completely.
What’s the catch?
If you forget to transfer your balance at the end of an interest-free offer, you face the sting of having to pay your provider’s standard APR from that point. This will usually be charged at a considerably higher rate, generally in the region of 15-20%. Therefore if you are going to take advantage of 0% offers you’ll have to be prepared to deal with the hassle of switching around every few months.
This could prove to be even more of a headache now than in recent years. With the economic crisis still ever-present, readily supplied credit is less available – so you may find yourself stuck on a standard APR with no easy new offers to jump to.
Another thing to watch out for is the handling fee often applied to balances transferred to new credit cards. Although this used to be either low or non-existent, it’s now not uncommon to be charged around 2-3% of your balance for the privilege of switching. Therefore you will have to work out how affordable switching between 0% deals will be for you when compared to the other options available.
It will also be worth your while comparing the expensive handling fee of a longer interest-free deal with the cheaper handling fee of a shorter deal, and seeing which will benefit you more.
So whether you want to transfer your balance to a card that offers a low interest rate for longer or one whose rate is zero but temporary, you’ll have to take into account how quickly you anticipate paying off your debt. And if you shop around for the best deals on credit cards and discipline yourself not to add to your outstanding balance, you should be able to pay off your debt whilst accruing the least interest possible.
