Four Tips When Looking For Balance Transfer Deals

Post by Sharat on July 10, 2009 · Under Australian Economy, Featured Articles, Hints and Tips, Personal Finance, Self Help, banking, interest rates · Comment

Balance transfer deals can be confusing at time. Done correctly though, they can really help alleviate the burden of debt for borrowers, and knock of thousands of dollars in interest payments. Here are four tips for the perfect balance transfer.

Tip 1: Look For The Longest Possible Deal

Generally speaking when transferring a credit card balance, the number one priority or the most important thing to look for is the card which offers the longest period interest free.

If an individual is carrying just $5000 in debt, the savings offered by differences in interest free period can be dramatic. A card with an interest free period of sixteen months, saves the borrower as much as $868.27 compared to a card with an interest free period of 5 months (assuming the borrower steadily pays $100 a month).

It therefore makes sense to look for the card or balance transfer deal with the longest interest free period.

Borrowers should be aware that transferring balances, between cards issued by the same lender is not possible.

Step 2: Avoid Paying Steep Fees

Fees are a part of life for people wishing to avail ordinary banking services in this day and age. Fees are fine for people who are not in debt, but start adding up quickly for individuals carrying debt.

When credit balances are transferred, usually the lender charges a fee as a percentage of the total balance transferred, which can be as low as 1 per cent or as high as 5 per cent depending on the card issuer.

It therefore make sense that once the borrower has assessed and obtained the longest possible interest free period, they should then start looking at the fees different lenders charge to undertake a balance transfer.

Step 3: Save Payments

If a borrower intends to pay off the majority of their credit card balance before the interest free period is over, then instead of making regular payments to their credit card balance, they can place the money in an interest bearing savings account, whilst the debt being carried is interest free.

The amount earned in interest may be marginal, especially with interest rates being so low, but an interest free period, is the same as free money (after fees have been deducted) and it makes sense for borrowers to put away their payments in an interest bearing account, and ensure the balance is paid off before the period is up. It is money for nothing.

Step 4: Avoid Negative Payment Hierarchy

We talk about negative payment hierarchy all the time, and when it comes to balance transfers and with good reason. Borrowers who don’t have a fair understanding of what it means could end up with a nasty shock, despite making the best effort to ease the burden of debt that they are under.

Simply put, a credit card will allocate any payments made on its balance towards the debt that costs the borrower the least amount in interest. That is to say, if a borrower engages in a balance transfer, any payment made on the card used to conduct the transfer will be used to pay of the existing debt, whilst any purchase made will continue to accrue high credit card rates of interest.

If a borrower makes a purchase after a balance transfer, they shouldn’t be fooled into believing that if they pay the whole amount of the purchase off, they will continue to pay no interest. The amount paid will simply be used to eliminate some of the balance transfer, whilst the purchase will continue to require interest servicing.

It is easy to fall into the trap, with some cards offering varying interest free periods for purchases and balance transfers. The former can be as long as three months, with purchases requiring interest payments beyond that, whilst the same card can offer balance transfers for as long as eighteen months in some cases.

The easiest way to avoid the problem is to use different credit cards for purchases and balance transfers. That way if a purchase is made, the borrower has a card specifically for the purpose, and can pay down the cost of the purchase whenever they desire.

The other alternative is to opt for cards with positive payment hierarchies. Unfortunately at the moment, there don’t seem to be that many around, but it is a growing trend, and within a few years, there will be a multitude of offers.

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