Balance Transfers

Balance transfers have become very popular with credit card companies in recent years as a way of winning new customers. A balance transfer is the process by which the outstanding balance on one credit card is transferred over to an alternate credit card, usually at a preferential interest rate. It is effectively the transfer of the debt on one card to another.

This tactic is used by credit card companies to attract new customers, and to tie existing customers in to them further. New customers are encouraged to apply for a credit card, and to transfer their balance to the new company, often at an interest free rate for a fixed period. This enables the new customer to not only consolidate their credit spending by moving their balances to one place, but also means that if they are given a grace period from paying high interest on what are often old purchases. The new customer has the opportunity to use the preferential or zero interest rate period to either clear the balance or to save some money.

Existing customers are also encouraged to transfer any balances from credit cards that they may hold with other companies to a particular card that they may already hold. Often these offers are advertised periodically to the customer, offering a low rate of interest on balance transfers, so that once again, the “debt” becomes moved to one credit centre.

In both cases, the credit card company benefits by encouraging loyalty, increasing the balances of their customers and therefore increasing the opportunity of earning future interest from balances that are not paid off during the interest free period, or if the interest rate is simply lower for a fixed period, earning interest on purchases that were not initially made using their card.

Balance Transfers can be highly beneficial to the card holder if researched thoroughly beforehand. It is important to read the small print with any credit agreement, and not simply accept the current advertising and teaser campaigns. Key questions to ask are:

· What is the duration of the introductory rate period?
· Once the introductory period has expired, what is the cards standard annual rate?
· Is the interest rate being offered applicable to the balance transfer alone, or to new purchases made using the card as well?
· What fees are involved? E.g. annual fees, late payment and over-the-limit penalties?
· Is there an “administration” charge for the balance transfer? If there is a 2% charge, a transfer of £2000 will cost you £200.
· Does the interest rate jump up if a late payment is made, negating the original balance transfer rate?
· Is the balance transfer rate for “initial transfers only,” that is for the amount you have requested to transfer during your initial application? If this is the case, all other balance transfers made will be subject to “cash advance” fees.

Balance transfers can take several weeks to process, and it is therefore advisable to continue to make payments to the current card company during this time. The new card company will advise the customer that the transfer is complete, but it is also good practice to contact the old card company and confirm that this is the case to avoid any chance of penalties for late payment etc.

The credit card market is a highly competitive one, and there are many good opportunities for customers to save money and improve their current card holding situations using the balance transfer tool. There are many resources online, including comparison engines and with patience and research, customers are able to make the most of the offers available.

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