For what are effectively pieces of plastic, credit cards can prove pretty divisive. While some people view them as an essential way to manage and control their finances, others consider them the first step in the road to financial ruin.
But all this debate can make it easy to miss a simple fact: the right credit card used in the right way, can prove a great way to manage debt – not convinced? Keep watching…
Balance transfer credit cards are designed to help you manage and clear existing debt, as they enable you to shift your balance from one card to another and not pay any interest for a set period of time.
The 0% term gives you time to concentrate on paying off the money you owe without worrying about the credit card company lumping on additional interest fees – in other words, it’s like an interest-free loan. And given that your existing card debt could have been incurring a typical annual percentage rate (APR) of 18%, this arrangement can save you a fortune.
You’ll need to keep an eye on the timeframes though, as once the interest-free period ends the card will immediately revert to a high rate of interest. This means you’ll want to get a card that offers you enough time to pay down your debt before this ‘0% honeymoon’ period is over.
But it’s not all about the interest-free duration. You will also have to consider the balance transfer fee – which is an amount charged by the new credit card provider to transfer your debt onto its card.
This fee is typically about 3% of the balance you’re transferring, but if you don’t need the longest 0% terms available to clear your debt, you should opt for a shorter-term 0% deal, which comes with a lower balance fee. Several charge less than 1%.
Some of the latest credit cards on the market offer the best of both worlds – a really competitive combination of low fee and long interest-free term, so these are definitely worth a look. In all cases, make sure you do your research and shop around.
You won’t be able to switch a balance from one card to another if they are issued by the same provider or even part of the same banking group. So if your debt is already on a Barclaycard, you won’t be able to transfer it onto another Barclaycard. And if your debt is on a NatWest card, you won’t be able to transfer the balance to an RBS card as both banks are part of the same group.
If you miss or are late with your monthly repayment, your credit card provider could withdraw the interest-free offer and immediately bump you up to a higher rate of interest. To avoid this scenario, set up a monthly direct debit from your bank account to make sure you never miss a payment.
In fact, while you are at it, do your sums on what your monthly repayments would have to be in order to clear the whole debt within the interest-free period – and then set up a direct debt for that amount and not just the minimum payment required. That way you can be sure to avoid interest.
A final thing to consider is that the best balance transfer offers are usually reserved for those with an excellent credit score – so check yours before applying.