What Is A Credit Card Balance Transfer And How Do Balance Transfers Work?

How to pick the right Credit Card Balance Transfer deal - What to look for and Balance Transfer calculation explained

A balance transfer occurs when outstanding balances from one or more credit cards are transferred to a new credit card with a 0% interest rate or with a lower APR.

The type of balance transfer that is available nowadays is a limited duration balance transfer.This means that the new credit card would offer a 0% interest rate for a certain period of time after which, the regular interest rate on that particular card would need to be paid. This act of moving debt from one place to another will save a considerable amount of money per year, an obvious advantage for anyone living in these uncertain economic times.

Once an outstanding balance is transferred, you will pay a one off transfer fee which ranges from 1% - 4% of the total outstanding balance. After that, you stop paying interest that was attached to the previous credit cards owned and only pay the interest charged by the new card after the interest-free period is over. This interest free period as it stands currently, varies from 6 months to an impressive 22 months. The length of time allocated to each individual is based on their credit rating or simply on any special offers are given by the credit card companies.

The APR dilemma and the vicious cycle of Credit Card Debts:

If you have a credit card with an outstanding balance of £/$2000, and the APR applicable to your credit agreement with the specific company is 18%. Therefore, your monthly interest payable on the card would work out to be something like this –

2000 x 18% = 360 per year

Or,

360 / 12 = 30 per month

Now 30 per month is only interesting, and anything you pay as a minimum payment per month towards that credit card will have to be 30 + the amount you pay to reduce your original debt with the credit card company.

It is very easy to end up paying for example, £/$40 per month, but in actual sense, you are only reducing your debt by a mere £/$10 per month. This may end up taking –

2000 / 10 = 200 months (We did not use a discounted interesting workout, but it would at least be 150 months!)

Now we all want to be able to make affordable payments towards our credit card debts and become debt free as soon as we can. However, the interest charges attached to our credit cards will always end up accounting for plenty of our repayments resulting in financial crisis.

How does Credit Card Balance Transfer help Buy More Time?

To overcome the dilemma mentioned above, our main aim is to pay as little interest as possible per month on the outstanding balance while we try and repay the credit card debts. The major obstacle is that piece of Credit Card Agreement you signed, quite exciting that was indeed when the credit card company sent you a contract to sign before they post you a shiny new credit card with custom designs too in many cases! You agreed to pay a fixed APR (Annual Percentage Rate – Explained) on your outstanding balance which could have been anywhere between 14% and as high as 34%. It is very difficult and in some cases impossible to reduce or amend the APR and as a result, you end up having to pay high interests for as long as you have a debt outstanding on your credit card.

However, the easy and most cost-efficient way of freezing or eliminating the APR is available and Balance Transfer is one of the most effective solutions to becoming debt free.

By transferring your outstanding balance, in this case, 2000 to a new credit card company with 0% APR (yes, this is possible!) you are effectively not paying any interest at all for a fixed period of time. Now referring back to what was mentioned at the beginning of this article in paragraph 2, many credit card companies offer different lengths of interest-free periods. The interest-free period may range from 3 months to up to 22 months. You will be required to pay a transfer charge of 1% – 4% on the total outstanding balance you are going to transfer.

If we use 18 months Balance Transfer for this example of £/$2000 outstanding debt and 2% one off transfer charge then your savings could work out like this:

One off transfer charge- 2000 x 2% = 40

Savings on interest for 18 months based on a standard APR of 18% -

30 per month x 18 = 540

Take away one off transfer charge of 40 = 540 - 40 = 500

Therefore, in 18 months, you would save nearly £/$500 if you find the right balance transfer deal and get accepted!

Reflecting on the method of Credit Card Balance Transfer

When used sensibly and responsibly, Credit Card Balance Transfers can be very beneficial and an effective way of managing personal finances. In fact, one never has to pay interest again. Although the minimum payment will have to be paid at the end of each month to start clearing the debt, interest will not have to be paid on this and once the interest free period is over, one could effectively conduct another Balance Transfer with another new credit card.

Now you know what is a Balance Transfer, how do Credit Card Balance Transfer work, however, there are two sides to this method. Although interest may never be paid again which is, of course, advantageous, this may not be the best way of conducting personal finances if you decide not to start making repayments.

If you do not make repayments and rest assured that you do not have to pay any interest, you may be right but this method means that one will constantly be in debt and never come out of cycle of paying off their debt. The method of a Credit Card Balance Transfer should be used more like a buffer and extra breathing space to be able to clear the debt more quickly and at a cheaper rate than before. It should not be used as a long term way of financing but rather, a short term break from intense debt repayment.

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