Balance transfer credit cards: What to consider first


If you are paying hundreds of pounds every year in credit card interest, then transferring your balance to a lower-rate card may seem like a no-brainer. Balance transfer credit cards are plentiful and, depending on your credit history, you can often switch your balance to a zero rate of interest for between 6 and 18 months.


However, these short-term balance transfer deals may not be the best solution for you if you don't plan to pay off your balance any time soon. In fact, picking a 0% APR balance transfer could actually cost you money in the long run. Here's why:

Finding the right balance transfer credit card isn't just about the interest rate
On the face of it, seeking out the lowest credit card balance transfer rate might seem like an obvious way to save money. After all, the aim of doing a balance transfer is to reduce the interest that you pay on the borrowing on your card.

However, there is a more important factor to consider when researching balance transfer credit cards: The time it is likely to take you to repay your balance in full. This is often more important than the credit card interest rate.

If you are sure that you can repay your credit card balance in full within the 0% promotional period -- typically between 6 and 18 months -- then you should consider such a card. You will benefit from paying no interest whilst you repay your balance in full.

However, if you don't think that you will be able to clear your card balance in full during this period, you may be better served choosing another type of deal. Once your 0% interest rate expires, you will have to pay credit card interest at the provider's standard rate, which could well be 15 to 20% or higher.

A long-term balance transfer may be a better choice
If it will take you longer than a few months to repay your credit card balance, then you may want to consider a long-term or ‘lifetime' balance transfer deal. These deals offer a low rate of interest for the lifetime of the balance.

While you may pay a higher rate than a short-term deal, the rate lasts for the entire time you maintain your balance, however long this may be. Depending on how long it takes you to pay down your balance, you could end up paying significantly less interest in the long term.

If you plan to take out a short-term balance transfer deal and then move your balance again once that deal expires -- some newspapers call these people ‘rate tarts' -- then it may still end up being more expensive than a long-term balance transfer deal. You will end up paying a balance transfer fee of around 3% each time you switch your balance. You should also bear in mind that there is no certainty that low rate balance transfers will continue to be available in the future. In addition, your circumstances could change over a period of time, meaning you're no longer eligible for certain credit cards.

Tip: If you're considering transferring your credit card balance to a new card, take out a calculator and figure out how long it will take you to repay the balance. Then, pick the appropriate type of deal. If you don't, it could cost you hundreds.

See related: Applying for a new credit card? Check your credit score first; 5 questions you should ask before signing up with a new credit card provider

Published: 29 June 2011