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Doing a credit card balance transfer: 3 things you need to consider

The idea of reducing the interest payments on credit card debt is highly appealing to a large number of consumers. After all, only 60% of individuals with credit cards repay them in full each month.

This means that a large minority of credit card holders could benefit from having a balance transfer card. This is where an existing credit card debt is moved to a new credit card which may offer a lower rate of interest than the existing credit card for a set period of time. This could reduce the amount of interest paid, as well as allowing a debt to be paid off at a faster pace. At the time of writing, there are a large number of offers available which could enable consumers to achieve both of those aims.

While the mechanics of a balance transfer card may appear to be straightforward, there are a number of considerations which consumers may wish to contemplate before going ahead. They include the fees associated with a balance transfer card, its interest rate, as well as an individual’s upcoming spending plans.

1. Check the interest rate

With a range of credit cards offering introductory rates on balance transfers that can be as low as 0% for a set time period, obtaining such a card may appear to be highly appealing for indebted consumers. Once an introductory balance transfer period ends, though, the interest rate on the new card may rise to a higher rate than that of the existing card. This could mean that while there is a saving to be made on interest payments in the short run from obtaining an introductory rate on the balance transfer card, in the long run the total amount of interest paid may be higher than it would have been on the existing card. Therefore, considering how long it may take to repay the debt, and the interest rate which will be payable throughout its term (both during the introductory period and after its end), could be a good idea.

For example, a balance transfer card may have an introductory 0% interest rate for a 12-month time period. While a borrower paying 14.9% on an existing credit card may make savings during the 12-month period, if the interest rate on the balance transfer card rises to 29.9% thereafter then they may be better off keeping their existing card, should they be unable to clear their debt within the 12-month introductory period.

2. Watch out for fees

While most consumers may focus on the potential interest savings that could be made from having a balance transfer card, in some cases there can be fees attached to a balance transfer card. For example, a balance transfer card may charge around 3% of the total amount to be transferred as a fee, which could reduce the potential interest savings that are available.

Therefore, an individual who is considering transferring debt to a new card should compare the potential interest payment savings to the balance transfer fee in order to determine whether it is an appealing idea. For instance, while a consumer who has a £750 debt at an APR of 18.9% who makes a repayment of £50 per month could save £102 in total interest costs over 15 months from using a 0% balance transfer card, a 3% fee of £22.50 could make the transaction less appealing.

3. Consider upcoming spending plans

Considering near-term spending plans may alter the optimum time to obtain a balance transfer credit card. For example, an individual who expects to make a major purchase in the short run may wish to wait for that to take place before obtaining a balance transfer credit card. Doing so could allow them to benefit from a lower rate of interest on a larger sum of money.

Alternatively, consumers who expect to make a large purchase in the near future may wish to obtain a balance transfer card that offers an introductory 0% interest rate on new purchases. This could save them a considerable sum of money, as long as their purchase is made within the eligible time period following account opening.

Verdict

While many consumers may focus on the potential interest saving which is available during a balance transfer period, there are other facets to consider before going ahead with a balance transfer card. The rate of interest during the duration of the repayment period, potential fees which could be levied by the new card, and upcoming spending requirements could all impact on how appealing a balance transfer card is.

Interested in improving your credit-card game? Check out our list of the best credit cards

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