Best Card for Balance Transfers

June 2nd, 2010

Which is the best balance transfer card? To find out, you need to realize how balance transfer cards can trap consumers with high interest charges on purchases. Read on to find out how to use your balance transfer card and enjoy the maximum benefits.

2.99% p.a. for 12 months

Balance transfer credit cards can offer lucrative deals for customers. However, many of these cards contain a hidden trap which can cause cardholders to wind up spending more money rather than saving money. So before you sign up for a balance transfer credit card, you should consider which would be the best balance transfer card for you.

What is a balance transfer credit card?

A balance transfer credit card is essentially a credit card that allows you to transfer a balance from one or more credit cards onto it. In order to attract more customers, these cards generally offer a certain length of interest free (or low-interest) period. While this length of time is 16 months in the UK and USA, the Australian market is lagging behind to some extent, and most balance transfer cards offer a balance transfer period of 6 months, although a few cards offer a nine month balance transfer period.

The ideal balance transfer card

The best balance transfer card would offer the same low interest on both balance transfers and purchases. For instance, consider a 0% interest balance transfer card – ideally, this 0% interest rate should apply to both purchases and balance transfers. This means that after you transfer an existing balance to the card and use the card, you will be charged 0% interest for the duration of the promotional period on both transfers and purchases made with the card.

The balance transfer trap

Unfortunately, most balance transfer cards are not as beneficial to customers as the hypothetical best balance transfer card discussed above. What happens is that card issuers generally charge a different rate of interest on purchases than on balance transfers. So for example, if the balance transfer rate is 0% for six months, the rate of interest on purchases might be 20%

This would still not be a problem were it not for the hierarchy of payments received. What happens is that any repayments made on a credit card generally go toward repaying the cheaper debt first – in this case, the balance transfer amount. So any purchases made on a balance transfer card continue to attract interest at the higher rate.<

The best balance transfer credit card would offer a low interest period on both balance transfers and purchases made with the card. However, most do not, so it’s important to read the terms and conditions of the balance transfer card before you start to use it.

If you do find that a high rate of interest is charged on purchases during the balance transfer period, you should not use such a card to make purchases. Instead, transfer your balance to the card and enjoy the interest-free (or low-interest) period, while making purchases with another credit or debit card. This way, you will have some respite from repaying your debt, while avoiding further high interest costs.