The 7 Golden Rules for Avoiding Balance Transfer Pitfalls

The 7 Golden Rules for Avoiding Balance Transfer Pitfalls

A couple of hundred on a credit card here, fifty quid on a store card there - it all adds up. And so does the interest!

But there is a simple and quick way to avoid spiralling into financial difficulty. Shift your debts with a 'balance transfer' and you can begin re-paying your debt rather than your bank manager's wages.

Before you dive in and pick up the first 0% balance transfer deal you see, beware! Banks are businesses, not charities and balance transfer deals are no exception. They are riddled with hidden pitfalls that exist to make money from you.

However, with a bit of planning, and some help from a consumer comparison service like ChooseMoney.co.uk, you can avoid the pitfalls and leap your way out of spiralling debt.

What is a balance transfer?

A balance transfer is a way of moving existing debts (the ones no doubt accruing interest at a savage rate) from various sources, such as credit cards and store cards, to a single new account that charges a discounted introductory rate - often as low as 0%.

What really happens behind the scenes when you agree to transfer your balance is that the company you transfer your balance to pays off your outstanding debts and sets you up a new account with them. You now owe your new card issuer the same amount you owed previously, except minus the multiple and probably hefty interest rates you were being charged before.

Bonus! You'll now repay less money in total and be able to become debt-free quicker. Plus, as well as enjoying a considerably lower rate of interest, if any, than before, you’ll also only have one payment to remember each month.

Avoiding the traps

Paying off less money in total and becoming debt-free faster is clearly everyone's intention when they sign on the dotted line.

However, be aware of the many traps banks set to prevent you from satisfying your debt free desires.

Golden Rule #1
The first golden rule of balance transfers is: don't use your card for purchases!

Many credit cards that offer 0% on balance transfers have a high rate of interest for purchases, which automatically makes them less attractive for spending. So once you've transferred your balance, put the card away at the back of a drawer and never be tempted to use it.

Recently though, some credit cards have been offering 0% on both balance transfers and purchases to try and encourage spending.

Tread carefully though if your credit card offers this by making sure the 0% periods on balance transfers and purchases end at the same time. Many credit cards offer a 0% rate on purchases that ends months before the introductory period on the balance transfer. If you have debts from spending left on your card at the end of the 0% purchase period you won't be able to repay them until you clear your balance transfer first. Post intro rate spending debts are high in interest, which credit card companies make a fortune off whilst you struggle to pay back the cheap debts from the balance transfer. Check the small print under 'Payment allocation' to see if this applies.

Golden Rule #2
Avoid the ATM! Using your balance transfer credit card for cash transactions will land you right back in the land of high interest charges and will effectively destroy your 0% deal.

Using a balance transfer credit card for a cash transaction will not only see you incurring very high interest rates on the transaction (as well as being charged a handling fee for the privilege), but you'll also be unable to repay any cash transactions until you've first repaid your promotional balance transfer in full.

Your cash transaction will then sit un-repayable, accruing interest charges until your balance transfer - and any applicable 0% purchases - have been completely repaid, effectively destroying the card's '0%' benefits you set out to enjoy in the first place.

Remember, cash transactions include cash withdrawals (including from a bank, the Post Office, or an ATM machine), getting 'cash back' at the supermarket, buying foreign currency or traveller's cheques and gambling transactions.

Golden Rule #3
No interest doesn't mean no payments! You'll need to make at least the minimum required payment each month (around 2% - 3% of the balance). If you don't, as well as incurring late payment charges, it's also very likely that you will lose the 0% promotional rate - so your balance transfer will be moved to the standard interest rate, which could be as high as 17.9% p.a.

Golden Rule #4
Be aware of clever ploys to trick you into spending, such as rewards for making purchases, or - in the case of companies offering extremely long balance transfer deals - purchase requirements. A one off purchase is sometimes asked for to obtain the full term of the 0% balance transfer offer. Needless to say, spending in any shape or form can only be repaid after the original 0% balance transfer and therefore gains unwanted interest, if you do want access to the full term make sure it's the smallest purchase allowed!

Golden Rule #5
Transfer your balance ASAP! It sounds obvious, but it is easy for time to drift and if you don't transfer the balance within the first 4 weeks, you could loose out on the 0% rate altogether.

Golden Rule #6
Watch out for balance transfer handling fees. Although, the introductory rate may be 0% the majority of credit card companies now charge a handling fee, somewhere in the region of 2-3%, to transfer the balance. Due to the increase in 'rate tarts*' it is becoming increasingly difficult to find a credit card offering a 'fee-free' balance transfer, although they do still exist. Choosemoney.co.uk's Balance Transfer search will help you sniff these out.

Golden Rule #7
Be careful of being too much of a tart. If you fancy shifting your debt from credit card to credit card every time your 0% period ends, be aware that this could be detrimental to your credit rating. Multiple applications in short succession and high debts that are not going anywhere could highlight you as a high-risk borrower, making it more difficult to obtain credit in the future.

Finally . . .

Make sure you get the right deal for you. Whether you are looking to shift your balance every 6 months, or fix your balance transfer for life, ChooseMoney.co.uk can help. With constant up to date information on the best credit card deals available and their powerful 'Find a Card' tool, you can pick the very best credit card for you based on your own unique requirements.

* Individuals that transfer their debts from one credit card company to another each time a 0% period ends so their debts remain interest free.