Avoid Credit Card Balance Transfers Pitfalls
Below is a MRR and PLR article in category Finance -> subcategory Credit.
Avoid Credit Card Balance Transfer Pitfalls
In today's competitive market, credit card companies continue to offer enticing deals despite declining profits and increasing bad debts. Andrew Britchford, a credit card analyst at Moneyfacts.co.uk, shares insights on how consumers can sidestep common pitfalls associated with these deals and maximize the benefits available. Selecting the right credit card may be more complex than it appears.
Key Considerations
When selecting a credit card, it’s essential to evaluate more than just the interest rate. Consider introductory offers, balance transfer deals, fees, incentives, and, if you delve into the fine print, the number of interest-free days, repayment order, and how interest is calculated. These elements can significantly impact the appeal of what seems like a great deal.
For those seeking a multi-purpose card, finding one with competitive terms across various features can be challenging. Providers often attract customers with appealing balance transfer rates or introductory offers, hoping consumers will use more profitable card features.
Understanding Repayment Order
One often-overlooked aspect is the order of repayment. If your bill includes cash advances, balance transfers, or purchases, how are payments applied? Will your payment cover the oldest transaction first or the most costly?
A prime example is the Capital One Platinum card, which offers 15 months of 0% on balance transfers. However, a condition to spend £100 on purchases by a certain date might hinder full benefit from this offer. By incentivizing dual-purpose card use, your 0% deal might unexpectedly disappear.
The catch is in the repayment order. If you make a £100 purchase and then repay it fully expecting no interest, that payment might apply to the balance transfer instead. Meanwhile, your £100 purchase could accrue interest at 15.9% until you clear both balances, assuming no further transactions.
Although this might seem minor, when applied to greater amounts and many users, it becomes lucrative for lenders, especially with an uncapped 2% balance transfer fee.
A Worst-Case Scenario
Imagine transferring a balance of £2,000 and later spending another £2,000. If you pay £2,000 expecting to clear your purchase, you'd actually be reducing your balance transfer, still leaving the purchase amount accruing interest and losing your transfer deal.
While Capital One isn't alone in this repayment order, only a few, like HSBC, Nationwide BS, and Liverpool Victoria, prioritize repaying the most expensive items first. Most do not actively promote using a balance transfer card for purchases.
Conclusion
Before committing, consumers should thoroughly understand the terms of any credit card deal. With countless options available, you can find one that aligns with your spending habits. To maximize savings, consider keeping separate cards for different purposes, such as purchases and balance transfers.
You can find the original non-AI version of this article here: Avoid Credit Card Balance Transfers Pitfalls.
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