What is a credit card balance transfer?
The credit card balance transfer mechanism is a not often understood opportunity available to anyone with social security who is in a spot of trouble with his original credit card and is looking into the possibility of fixing the mess on a new one.
The credit card market is a hotchpotch of great deals and great pitfalls at the moment. Companies are exploiting card users and banks, banks are exploiting merchants, merchants are exploiting consumers and some clever little eggs are even exploiting the credit card issuers themselves using their own promotional offers against them to make easy money.
It’s easy to get lost in this labyrinth of plastic finances, and even easier to get riddled with so much debt that you’d need drilling equipment to bore your way out of it. At such times the balance transfer scheme can come in quite handy. Considering that once you’re stuck paying compound interest on top of the (normal) 16% annual interest you’re already paying on your expenditure, there are few ways to get out of this vicious circle of debt, the balance transfer can be your knight in shining armor if you understand how it works.
In fact, that’s exactly what credit card companies had in mind when issuing this scheme. In an effort to lure consumers to their credit card, many companies offer free balance transfers from your old credit card. Once the balance has been transferred and the money is owed to a new company, they will try and provide a period of time called the grace period in which the rate of interest charged is significantly less on the new account than it was on the old one. These ‘new’ interest rates can sink as low as zero, although one or two percent are more common. This is usually part of the normal introductory rates that card issuers offer for new customers, but with the significant difference that you’re paying old debts on this reduced interest just by changing your credit card.
So in short, what you’re doing is opening a new account that offers a balance transfer when the old one expires, only to transfer all of the balance, and debt, to the new card to begin a period of low interest charges, closing your old account in the process.
However, we all know what they say about the best laid plans. While balance transferring to pay off loans still works in theory the powers that be are beginning to catch on and sometimes impose hidden charges and transfer fees that can be a percentage of the balance transferred. They may also charge high joining fees, which you should never agree to, considering that you’re already giving them a lot of commission, and potential commission, simply by buying using their card.
Filed under: credit card