Managing your money can seem like a complex thing to get right. Indeed, one in six adults is said to have financial worries in the UK. And, in the USA, that is one in every three adults. The key to keeping on top of things when it comes to your finances is to understand all of the options open to you and when to use them best to your advantage.
One clear example of this comes with the use of credit cards. These little pieces of plastic are, according to the UK Cards Association, used to make almost 300 million purchases a month in the UK. But how to best manage a credit card?
Usually, credit card carries very high interest rate. It’s best to pay off the entire balance before the payment is due. In case you can’t, then one way to avoid paying high-interest rate is doing a balance transfer to a lower or no interest credit card.
So, when is the right time to do a balance transfer?
When you’re clear on what it’ll cost
First of all, it’s important to know the impact of what you’re doing. It’s thought that only one in 20 Brits actually understand the true cost of balance transfers and that many people don’t realize there will be a fee involved.
Customers are said to pay £334 million in balance transfer fees each year – often in a mistake when they pick a card which proves to be more expensive than they thought.
Most ‘0% balance transfer’ offers to mean that you’ll pay no interest on the balance you transfer over for a set period – not that there is no cost in moving it over. It’s important to understand the extent of the fee – which will be a couple of percent of the balance – and weigh up whether you are happy to pay this before you agree.
The total amount that you transfer has to be less than the credit limit on your new card (including the fees) too.
When you can save with a 0% introductory offer
Just because balance transfers are misunderstood, this doesn’t mean that they won’t offer you a good deal.
The Money Advice service offers a good example of the savings to be made with a transfer, with an example of a customer with £1,000 of debt on a credit card with a 17.9% APR who can afford to pay off £20 a month.
It shows how, in this instance, the customer could save between £190 and £260 over the course of the repayments by making the transfer. The ‘0% period’ should be seen as an interest-free window with which to pay your balance off. If you reach the end of this without paying off what you owe, this might well be the time to switch to another card.
When your goal is solely paying off the balance
Some credit cards are geared towards catering for your balance transfers. However, you might well find that the ones with the best offers for this aren’t ideal for new purchases too. In some cases, any purchases you make might well carry the standard APR.
If you make a one-off big ticket purchase that you want to pay off over time and you’re solely focused on paying this off – as you would a loan – then moving the balance around for a better interest rate could be highly beneficial.
Readers, when would you go for a balance transfer and why?