Balance transfer: Tricks and traps

16/01/2012

If ever there’s a time when a consumer’s credit card balance hits home, it’s Christmas and New Years. When you’re constantly paying off your credit card but barely putting a dint in it because the monthly interest rate is too high, advertised balance transfer offers can look very attractive. Banks also use low balance transfer rates to encourage consumers to switch cards and hopefully stay with them forever.

It sounds appealing but there are fish-hooks to avoid in balance transfer deals:

Fish-hook 1: Most lenders apply payments to the outstanding balance that has been transferred first, rather than the new spending, which is attracting a higher interest rate. The way around this for clever consumers is to refrain from spending any money on the new credit card and slowly pay off the balance taking advantage of the low rate. Only after the balance is paid off in full should you spend on the card.

Fish-hook 2: After the advertised number of months – these vary from 6 months to life of the balance - all unpaid balances are transferred to the standard interest rate. It’s important to know what this ‘revert’ rate is, as it can be as low as 12.9% or as high as 19.95%. As a general rule, before switching credit cards, consumers should know the promotional rate, when it expires and the rate they will pay after expiration.

Fish-hook 3: There are no loyalty points or interest-free days on the balance transferred. Interest is charged from day one on balance transfers.

Fish-hook 4: When transferring from more than one card to one new credit card, there may be different introductory rates. The fine print in some cards say that where you’ve made more than one balance transfer, payments may be allocated to the balance transfer with the lowest interest rate first.

Finally, several of the banks have useful balance transfer calculators on their websites. Even better is a balance transfer calculator that includes the introductory interest rate and term, the normal credit card rate, the annual fee and any balance transfer fee that may be applicable.

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