Understanding Credit Card Balance transfer offers

These offers are a good deal, if you’re smart and disciplined.  Make sure you know what you are getting yourself in to.

Balance transfer offers have the objective of getting you to use them by transferring existing credit card debt to their new credit card facility.  They do this by offering you a special rate for the transferred amount for a period of time. Basically, to get you in, the financial institutions offer you a special credit card interest rate ranging from 0% to 9% for any credit card debt you transfer to them from a foreign credit card provider.

This can be just what you may need as it will significantly lower your monthly repayment commitments, giving you an opportunity make meaningful inroads into paying off the debt.  Resist the urge to take on more debt while paying off a balance transfer. Instead, pay more than normal as more of your payment will go towards paying down the balance.
The way the credit card institutions make money is in the hope you do not pay off the transferred amount but just continue to pay the minimum repayment.  Even worse would be for you to take on additional debt on the credit card.  Once the reduced interest period expires, the credit card rate reverts to the significantly higher rate – thus catching you in the credit card trap.

Some questions to ask before taking part in these special offers are:

  • What is the balance transferred honeymoon interest rate?
  • How long does it apply?
  • Does it apply to new purchases and balance transfers?
  • What is the rate for new purchases?
  • What will the new rate be once the honeymoon period expires?

My recommendation is to avoid using these special credit card balance transfers unless you are absolutely sure you will be able to pay off the debt before the honeymoon period expires.  If the debt is a significant amount it is better to consolidate the debt within your mortgage.  If possible, the debt should be separated and clearly identified from the home loan and the previous credit card monthly repayments should be made.  This is to avoid stretching a short term debt across a 30 year period, thus making the debt very expensive in the long run.

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