As some of you might remember, last Monday I opted to provide readers with a brief overview of the ‘0% on Purchases for X months’ credit card as well several tips on how to use one efficiently.
Today I shall focus on another type of credit card- the ‘0% on Balance Transfers for X months’.
For the avoidance of any confusion, an example shall be adopted:
à Dizzy Credit Card, 0% on Balance Transfers for 24 months, 24% APR thereafter, 3% Fee applies on transaction
The mechanics behind a Balance Transfer Credit Card are quite simple: you use it to pay off another credit card.
How the card works
Let us assume that you have got a balance of £ 2000 on Credit Card A and you want to transfer it onto the Dizzy Credit Card (as per above). The credit balance will then be transferred onto the Dizzy Credit Card and the one on Credit Card A will be paid off.
The £ 2000 will not accrue ANY interest for the first 24 months but will accrue a monthly interest of 2% (24% APR) when the 24 months lapse.
Also, it must be noted that, on transferring a balance, a FEE will ALWAYS be applied to the transaction.
As per above, if you transfer the balance of £ 2000 onto the Dizzy Credit Card, a fee of £ 60 will also be applied to the transaction (3% of transfer).
Although it does sound rather simplistic, the above might also sound a bit confusing to the average consumer who will rightfully enquire as to whether it is at all sensible to consolidate debt with further debt.
I trust that the example below will demonstrate that, even though the 0% Balance Transfer Card can initially seem quite daunting, if used wisely, it can help you sort out your debts and finances whilst saving you a fair amount of stress and anxiety.
Let us assume that, eleven months ago, you took out a 0% on Purchases for 12 months, 24% thereafter credit card and you purchased a TV set worth £ 1000 on it.
As you had experienced substantial financial difficulties during those eleven months, you were only able to repay £ 500 of that £ 1000. You are quite aware that, come next month, the outstanding £ 500 will start accruing a monthly interest of 2% (24% APR).
Such an arrangement is quite unacceptable to you as it will further worsen your financial position.
Taking out a Dizzy Credit Card might alleviate your financial woes; by transferring the £ 500 balance onto the Dizzy Credit Card, you shan’t accrue any interest for another 24 months. Doing this will cost you £ 15 (the 3% fee) which is considerably less than the extra £ 10 that you might have been paying monthly on your 0% on Purchases for 12 months, 24% thereafter credit card.
To conclude, transferring the balance onto your Dizzy Credit Card will save you roughly £ 240 (£ 10x 24 months), excluding compound interest.
Further to the above, some balance transfer credit cards also offer points or air miles for every pound or ten pounds spent on the credit card (as discussed in my article last Monday); those can later be exchanged for various rewards and even free flights.
Once more, I would like to reiterate that I am in no way encouraging anyone to live his life on credit. Rather, I am simply trying to present the readers with an efficient and economical way of utilising the various types of credit cards on the market to their advantage.
As previously noted, if used carefully and properly, credit cards can be a great way of consolidating your existing debt, sorting out your finances and even getting something extra on top of that.
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