Applying for a 0% balance transfer credit card can be the ideal way to reduce your debt fast and cut down the amount of interest you pay. The whole idea behind these types of accounts is that you transfer over the outstanding debts you have owing on other credit card accounts over to your new card. Those amounts wont attract any interest for the introductory period, so you save plenty of money.
This is a really appealing offer for most people, so its understandable why youd want to apply.
However, if youre not careful you could get caught out by the banks clever advertising tactics. You see, banks and credit card providers are very crafty in how they word their offers. They highlight the fact that youre only paying 0% interest on your debts.
What they forget to tell you is that there are certain terms and conditions that you need to abide by in order to really get the most out of balance transfer credit cards. This leads lots of people into making some very common mistakes with these accounts that can easily be avoided.
Here is a brief look at some of the more common traps of 0% balance transfer credit cards.
Limited Promotional Period
The length of time that the introductory 0% balance transfer offer extends is usually around 6 months with most lenders. This means you only get the benefit of paying zero interest during that time.
If you transfer over a balance amount that will take you longer to repay than the initial six months, you could find that the outstanding balance will suddenly attract a much higher rate of interest after this time.
For example: lets assume you transfer over $3,000 from your old credit card account to your new 0% credit card. You would need to repay at least $500 per month to pay off that balance amount before the rate reverts to the standard variable rate on that account.
If you know you cant repay this entire amount in the time given, consider transferring less money. Always work out how much you can afford to pay back over the introductory term given. This will help you save money and youll avoid the trap of paying the higher rate once the special rate ends.
Different Transaction Types
So many people apply for 0% balance transfer cards believing all their transactions will be at zero interest. The balance amounts you transfer in from other credit card accounts wont attract any interest. Yet this isnt true of other transaction types.
For example, if you pay for a purchase using your card the amount you spent will attract the standard purchase interest rate. If you withdraw cash from ATM with your credit card, this may attract the higher cash advance interest rate, along with a cash advance fee.
When youre focused on repaying credit card debt, the last thing you want is to increase your debt and raise the amount of interest you pay. Keep your 0% credit card for debt reduction only. Dont be tempted to use it for other purposes.
Many lenders implement a payment allocation policy that catches so many customers in its trap. Payment allocation simply means that the amount of money you pay off your account may not always be paying off the portions you think.
For example, lets assume you transfer over $1,500 from another account and then you spend $100 paying for a purchase. One day later, you repay $100 to try and pay off the purchase amount, but that money may go instead towards your balance transfer balance first. This leaves you with that $100 purchase being charged at a much higher interest rate.
The same is true in reverse, too. Some lenders advertise that they allocate payments to the amounts attracting the highest interest rate first. So lets assume you withdraw $100 cash from an ATM using your card. You repay that same $100 and that clears the cash advance amount.
What happens here is that your balance transfer amount isnt being paid off. Banks know this and they hope you wont repay the total amount before the introductory 0% period expires. This leaves you stuck paying off your debts at a much higher rate once the cheap rate ends.
Keep these simple traps in mind if you hope to benefit from a zero per cent balance transfer offer. Always use your card for debt reduction purposes and avoid using it for other transactions. This will ensure you get the most out of your offer and save you money in the long run.
Sam Jones, the author, has used the uSwitch comparison website to compare 0% balance transfer credit cards. He thinks that there are great deals if you search around and that everyone should look into improving their credit card choices.
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