Credit Card Blog

A lot of credit card providers offer 0% interest deals on balance transfers and also on purchases. Usually these are for different lengths of time.. so for example, a provider could offer:

Example: 5 months interest free on balance transfer and 2 months interest free on purchases..

This sounds like a great deal - if you transfer your balance from another card then you don’t have to pay any interest for 5 months on that.. and then if you make some purchases in the first 2 months then you don’t have to pay any interest on that either..

It sounds great - you can move your money and buy some stuff in the first 2 months and you don’t have to pay an extra back… this is kind of true… but there is problem, a loop hole that credit card companies exploit to get more interest from you. When you have a debt, once you pay it off and the interest on that debt, then that is that, you don’t owe any more money. If you for example spend £100 on clothes or whatever and you have to pay 3% monthly interest, then you can pay £103 that month and your debt is gone..

The problem however is if you’ve done a balance transfer beforehand. Credit card companies state that when you are paying off your card you pay the promotional balances first. This means that if you have balance transferred £2000 and then made a £100 purchase, if you pay off £100 then you are reducing the money from your transfer. So instead of paying back the £100 purchase you are instead reducing the amount you have transferred.

Because balance transfer interest free periods are generally longer than purchase interest free periods, you can end up being stuck with having to pay interest on your purchases.. but not being able to pay it back because you have to pay back the amount you have transferred first! In the above example, what should have been £103 to pay off a £100 puchase, can turn into a lot more.

Example:

1. You transfer £2000 from one credit card to another (the card has 12 months interest free on balance transfers)
2. You then spend £100 in your first 2 months (the card has 2 months interest free on puchases)
3. You can only afford to pay back around £100 per month.
4. After 2 months you have to start paying interest on the puchases.. (interest rate is 3% per month)
5. You end up paying £3 per month on the £100… which carries on for the next 10 months becuase you are reducing your £2000 debt…
6. After 12 months the interest on the £100 of purchases has been around £30 - and the £100 debt still remains!!

What’s the moral of the story - balance transfer cards can be really good -BUT BEWARE!! Do not use it for purchases or for cash withdrawals, as you will end up paying a lot of interest and what seemed like a really good deal will have ended up costing you a lot of money! If you get a card for transferring your balance, put it away afterwards and DON’T use it anymore.. this way you will not have to pay any interest at all until the promotional period is over.

This entry was posted on Saturday, August 2nd, 2008 at 3:53 pm and is filed under Uncategorized.
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