If you are like many of us, your bank has sent you notices over the years stating if you transfer a credit card balance from another account to the credit card you have with them, they will reduce the interest to 0% for 20 months, or (insert time frame here)
That means no interest will be paid/charged on the account for the next 20 months.
It sounds like a pretty good deal if you have other credit cards with a balance on them, especially if they are high interest rate cards.
Even if the credit cards or other loans you have are on low APR’s or interest rates, nothing is lower than 0%.
Once you know and realise how long it takes to pay off a credit card due to the high interest rates some charge, you can see why 0% not only looks good, it feels good, too.
If you have a £500 balance on a credit card, and the interest rate is 29%, which is high, but many cards do charge these high rates, and only make the minimum monthly payment, which is 3% of the balance, or £15 a month, it will take you 233 months, or over 19 years to pay back the £500.
By paying an extra £10 a month, you can cut that payback time to just 40 months, or just over three years. Pay an extra £25 each month, and you cut the payback time to 18 months, saving you just over £1,252 in interest.
That’s a huge savings, and it is easy to see why balance transfer being offered at 0% are very enticing.
The Fine Details
Of course as with everything, there is the small print, or fine details with balance transfers.
Some of these details can be:
* Fees: What fees are involved in transferring the balance. One bank stated a fee of 2.9% or the balance transferred, or a minimum of £5 was the fee involved. This means if you transfer a balance of £2,000 from one credit card to the zero balance card, you will be charged, £58, so your new zero interest account will show a balance of £2,058.
* Credit Limit: You will only be able to do the balance transfer if the credit card offering the zero % interest rate has a credit limit high enough to cover the amount transferred. If you are transferring a balance of £2,000 to an account with a £3,000 credit limit, and you only have £500 on that account, you will be fine.
* New Purchases: In many instances the 0% interest rate offering is only on balance transfers, not on any new purchases made on the card. So if you transfer £2,000 to a zero % card, you get zero % on the amount transferred, not any new purchases you may make on that account.
In addition, the bank or credit card company may not only charge you the usual interest rate on any new purchases, but take any payments you make to be put toward those purchases first, before applying any payment to the transferred balance.
* Time: How long is the zero or low interest rate for? It will be a set or fixed time, maybe 12 months, or 24 months, and then the interest rate on any remaining balance will revert back to the usual rate.
These are all things you need to know and keep in mind when researching a credit card balance transfer.
Will A Balance Transfer Work For You
In order for a balance transfer to work for you, you need to look at three things closely:
- Time Frame
- How Much Extra Can You Afford to Pay
In reviewing the fees involved, you may find that the interest you would pay on the current credit card works out to be less than the fees should you transfer the balance.
So it is in your interest (pun intended) to not make the transfer.
Then in looking at how long the offer is extended, 12 months or longer, how much extra can you afford to pay each month towards the account.
Having 0% on a credit card is great, but not if you don’t pay more towards it to pay off the balance.
You need to calculate as to if you can pay off the balance in that time period. In this easy example we will say you transfer a balance of £1,200 to a 0% card, and can afford to pay £100 each month during the 12 months the low interest rate is being offered. This means you will pay off the balance within that time frame.
At 0% interest, you are just paying back the account balance and no interest each month.
Using a 0% balance transfer offer to reduce and/or pay off a high interest rate credit card can be a good option to get out of debt.
However, you do need to know all the details involved, and also do a bit of math to see if the deal is as good as it seems, and if it will work for you.