The True Cost of Balance Transfers
It’s well known that the seller markets responds to buyer demands; it’s a basic law of economics. But it’s doubtful whether the early economists could have perceived the way the credit card industry reacts to the borrowing habits of the public!
For sometime lenders have been offering interest free periods to people who transferred their balances. But the public were canny and saw the opportunity this allowed them and many took advantage and made some money for themselves at the expense of the credit card companies.
It’s fair to say the credit card companies lost out. So many of them have now introduced balance transfer fees. Typically a fee of 2% of the balance with a ceiling of £50 is payable. But, like the interest rate itself, this is often negotiable.
Romeo, where for art thou?
A bunch of flowers from Interflora to say “I’m sorry” or “get well soon” could cost you much more than you think if you put it on the card you’ve just changed your balance to.
As soon as you use that card you will incur interest at a completely different rate than your balance transfer and you will be kicking yourself as every payment you make will come off the low interest sum, not the highest.
A change is as good as a rest
If you are considering changing your credit balance to a new card you need to think about the following:
- how much is the balance transfer fee?
- how long will the low rate apply?
- How much will it cost once the rate goes up?
- How much interest would you get charged if you stayed with your current credit card?
The bottom line is: will it actually be cheaper to change?
If you are never going to use your credit card except to reduce the balance it might be cheaper.
Who was that I saw you with last night?
In their attempts to win and retain people the industry has made it more tempting for us fickle public to become even less loyal. The lure of interest free promotions on balance transfers prove so tempting to some they become rate tarts, swapping from one to the next as soon as they have exploited the good times.
Quite a catch
You must always remember to make a note of when the interest free, or low interest, period ends. As soon as you accidentally go over that period you could ruin all the hard work and money saved.
Try to stay one step ahead of the game by watching what the other credit cards are offering and have your next card in mind one month ahead of when yours is due to increase its rate.
There’s money in them there bills
It is possible to make all this work for you in more ways than even a rate tart might expect.
When transferring money into a very low interest period, or ideally an interest free one, if you take full advantage of the amount you are allowed to have in credit you can put the balance into a high interest deposit or savings account for a few months. In this way you will actually make money as long as you put the full sum back into the credit card when the promotional rate is over without incurring the standard charge.
So, overall, the simply act of moving your balance from one card to another can actually raise quite a lot of questions to think about before making that move. And if you’re lucky you can even make money from it.