Understanding Credit Card Balance Transfers

Credit cards offering balance transfer deals were all the rage in years gone by, with a high percentage of new card applications being generated on the back of attractive offers that could save applicants lots of money by transferring across existing balances from another card and taking advantage of a period of interest-free credit. It was a means of generating new customers as well as taking business from a direct competitor, so a double hit well worth paying for. The cost to the card company was effectively an interest free loan of the transfer balance for the offer period, which varied by card from between 6 to 18 months. Obviously for large balances ( providers typically imposed a limit) which remained in place for the full period allowed the cost could be high, but not every customer would take full advantage of the terms offered.

As this method of new business generation became adopted by most credit card companies the transfer of customer’s accounts between providers started to balance itself out. Instead of generating new business and growing market share, card companies were merely churning the customer base between themselves. Card providers would lose just as many customers as they generated new ones, so the cost of providing the interest free credit periods started to prove unviable. The solution many credit companies adopted was not to drop balance transfer offers but to change the terms of the transfer arrangements that limited the exposure to extended free borrowing available to a new customer. Card providers couldn’t afford to opt out of the balance transfer market while it was still popular as that would then just see their customer base gradually diminish as borrowers migrated to interest free balance transfer deals offered by their competitors.

The solution to remaining in the balance transfer process was to impose more complicated terms and conditions which see some customers unavoidably transgressing the rules and either reducing their interest free period of credit or incurring additional interest charges. These methods served to offset the cost of providing these balance transfer deals and allowed credit card companies to remain in the game.

Typically these new and more complicated conditions involved measures such as charging customers an initial fee on the balance moved across. These charges would effectively fund the first few months of interest on the balance involved. Card companies would also charge higher than average levels of interest once the interest-free period had expired. So those unwary customers who failed to pay off or move their balance after the period had expired would face high interest charges, which also help card providers recoup some of their costs. Another condition frequently used is to apply any repayments first to the customer’s interest free balance rather than any new purchases made on the card. Because card companies impose a minimum monthly repayment, the balance attracting zero interest will always be reducing, while the balance generated by new purchases and attracting interest charges, will not start to reduce the whole transfer balance has been paid off. The advice here is to avid making any new purchases on a card setup with a balance transfer, until the full balance transferred originally has been paid off.

There are hardly any credit cards that offer interest free balance transfer without charging an initial fee. By all means shop around for the best deal by checking the transfer fee and looking for a card that offers a zero interest period on both purchases and balance transfers. In some cases the initial fee for transferring a balance is capped to a maximum level, but these caps are usually only applied to card deals with shorter periods of zero interest. Quite often the interest free credit period offered on new purchases is much shorter than for balances transferred from another card so seek out a deal that offers a similar period for both types of balances.