Credit Cards Balance Transfers

Note: Credit card balance transfers, where you move your account to a new lender can be a shrewd move that will save you money. This article examines the amount that can be saved and shows you how to avoid the potential dangers that exist.

Right, let's start by taking a look at how much you can save with credit card balance transfers.

For example, 6 months interest at a lender’s standard rate of 18.9% APR, on an average balance of $5000 will cost $472.50. If you switch to a new card that offers 3.5% APR on balance transfers for 6 months and a standard rate of 9.9% thereafter you’ll only pay $87.50 interest on the $5000 balance during the first 6 months.

That represents a saving of $385 over 6 months. Even after that period, during the first 6 months at the higher rate of 9.9% APR, you’d only pay $247.50 interest compared with $472.50 at the old rate, making another saving of $225. In one year, by virtue of only one transfer, you’d save $610.

But this information about balance transfers comes with a warning. Yes, it’s one of the dangers lurking in the small print that I told you about earlier.

BALANCE TRANSFER RIP-OFF ALERT!

Make sure you know the order in which your payments to your credit card will be applied to pay off the different types of borrowing on your account.

Imagine that you’ve just transferred $5000 to a new card, with a promising looking 2% APR on balance transfers until they’re fully repaid and a more normal looking 18% APR on all new purchases. Not bad you think as you add up the money you’ve saved.

Then, over the course of the next few weeks you run up an extra $1000 of new spending. But to avoid the steeper rate for new purchases (18%) you repay $1000 towards your account at the end of that month. You assume that it will cover the higher rate credit that you’ve used that month, leaving the $5000 at 2% APR.

Wrong! Wrong! Wrong!

Unfortunately that's not how most lenders think! Almost without exception any payments made will first be used to pay off the cheapest class of credit on your account.

Yes, you’ve guessed it, the low rate balance transfer.

So you’re left with an account that has $4000 at 2% APR and $1000 at 18% APR. Instead of the interest for that month being around $8 it is nearer to the $23 mark.

As a general rule cheap credit is repaid first while more expensive credit is left to run.

1st = Any fixed special rate balances (i.e. cheap credit)
2nd = Any other interest or special charges (i.e. mildly cheap credit)
3rd = Standard rate borrowing (i.e. expensive credit)
4th = Cash advance balance (i.e. downright extortionate credit)

And you wonder why lenders make so much money!

So if you do transfer a balance in that type of situation, ONLY spend on the new card if you’re happy to pay the current interest rate for new purchases for as long as it takes you to clear your account (because any new spending will in effect be ‘locked in’ to the standard interest rate for new purchases until the amount transferred is repaid, which could take months or every years if it’s a large amount).

If you want to avoid that problem, and I strongly suggest that you should, use another credit card with a low standard rate for current purchases and avoid any further borrowing on the card that contains your balance transfer until it has been repaid.

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