The Cardinal Sin With Balance Transfer Cards

February 3rd, 2010

Make certain you understand what is the worst thing you can do with balance transfer cards. Discover the implications of spending on your card to avoid being hit by high purchase interest rates for months or years to come.

0% p.a. for 6 months with 2% handling fee

Balance transfer cards know-how

Balance transfer cards are a great solution if you have built up a debt on another credit card and you need to reduce the level of interest you are paying.

Choosing the right balance transfer card is about looking closely at your personal finances – the amount of your debt and how quickly you should be able to pay it off if you put in the effort – and then selecting a card that allows a sufficient period of time for this to be realised.

The most advertised offers recently have been introductory balance transfer rates of 0% interest for six months. Alternatively, you can find twelve months for a few percent more, or around 6% or 7% for the life of the debt. There are variations within these figures and periods, but that should give you a good idea of what to expect.

The key is to be realistic and not think you can clear too large a debt too soon. Grabbing a 0% deal and then being unable to pay it off in time will mean you will then be subject to the regular rate of interest applied to the balance transfer card, which may be higher than on non-balance transfer cards. There may even be a clause in the fine print that says any debt remaining after the offer period expires will be subject to the rate for cash advances, which is normally around 20%.

Mistakes can be costly

But if getting this wrong can be a costly error, the cardinal sin with balance transfer cards is using them to make purchases after you transfer your balance.

This has the potential to send you to credit card HELL. To get trapped in credit card hell is easy. Let’s say you take a 3% balance transfer deal for a year and you make your transfer. You then make $500 of purchases on your card at 15% APR. Every cent you repay to that balance transfer card will go towards paying off your 3% debt in full before your $500 at 15% is touched. If it takes a year to pay off your 3% balance transfer, that’s a year of your $500 of purchases accruing interest at 15%. Ouch.

Suddenly, the whole point of grabbing a balance transfer card in the first place is called into question, because what you save with the transfer is negated by your purchases.

The Cardinal Rule is therefore: Never make purchases on a balance transfer card until your transferred amount has been completely cleared. Use another card for purchases, or use cash. Here endeth the lesson.

Editors Choice: Featured Credit Card Deals

	Interest Rate (p.a.)	Balance Transfer Rate (p.a.)	Annual fee	Cash Advance Rate (p.a.)
Westpac 55 Day Credit Card	0% for 5 months (reverts to 19.59% )	3.99% for 6 months	$0	21.49%
Citibank Clear Platinum Card	11.99%	2.9% for 12 months	$99	21.74%