Why balance transfer cards don't work for everyday spending

By Gail Bertram

Credit cards have been a financial staple throughout the world for decades, but recently an increasing number of British shoppers have been changing the way they use their plastic.

More and more, credit cards are being used to cover the cost of necessities such as food and petrol. As a result, credit card companies are quick to respond to changing spending habits by making a wider range of products available to the consumer.

With so many options available, finding the best credit cards to suit your financial needs can be a struggle. Most credit companies offer new customers the facility to transfer an existing balance from their old account to their new credit card, often tempting people to switch by offering 0% interest on balance transfers.

It sounds great: a chance to transfer your existing debt and pay no interest on that balance, but before you get carried away you should stop and think. There's no such thing as free money, so why does it seem like the credit card companies are giving it away?

How balance transfers work
Essentially, when you sign up to a new credit card, your debt is purchased from your existing lenders. Your balance on your old cards is set to zero, and your new credit card now owns the outstanding balance. Any interest or fees you pay will now go straight to your new credit card company.

Benefits of balance transfers
There are several key advantages of balance transfer credit cards when placed in the hands of a savvy spender.

1. If used carefully, a balance transfer credit card is ideal to consolidate multiple card debt into one lump sum. As long as you pay off the balance within the fixed time period of the 0% offer, you won't be paying more than you owe.

2. Balance transfers often help you streamline your plastic property. By going over all of your credit cards and transferring the debt from those that offer the poorest service or highest interest rates, you can effectively stop using the dead-weight cards and make sure you're making the most of your credit situation.

3. If you have a large debt and can't repay it within the 0% interest period, it is possible to transfer the remaining balance to another company and take advantage of another offer This is a process known as "tarting." However, this depends on another credit company accepting your application. It is recommended you start hunting around for a new deal at least six weeks before your current 0% interest rate expires.

Dangers of balance transfers
As with anything that seems almost too good to be true, there is more than one catch to balance transfer cards.

1. A balance transfer card should not be used for purchases. Although the existing balance moved from your old credit cards is interest free, any additional money you spend on the card will be charged at the normal interest laid down in the terms and conditions, unless you have a 0% interest rate on purchases included in the deal.

To compound the problem, any payments you make will be put towards paying off the balance that was transferred first, rather than the purchase. This means that if you have £1,000 interest free and make a £20 purchase on the card, you will have to pay off the £1,000 first, and that £20 purchase will be accumulating interest all the while.

2. Some cards offer a "no fee" balance transfer facility, where you are not charged by the credit company for taking on your debt. However, these deals are rare, so check to see what fees are charged and work out if it's really worth your while.

3. Credit card companies are not obliged to warn you when your interest-free period comes to an end. Keep a close eye on your finances, and don't get caught out when 0% shoots up to a crippling level of interest.

4. Credit companies will look at your credit score before choosing whether or not to accept your application. Many things can affect your credit score, but, in the case of balance transfer cards, multiple applications over a short period of time can be particularly damaging.

By being thoughtful and deliberate in your applications, you can minimise the impact on your credit score and still get the best deal for your financial situation.

Choosing a card
By looking at one credit product against the other, you can see how they could help or hinder your finances in the long run, and make an educated decision about which credit card products are best for your situation.

Published: 9 April 2009