Following a review of 41 cards from 20 different financial institutions, the July 2008 Consumer Action credit card survey revealed that the average APR was 13.54%. After deducting fees, a low rate balance transfer can help to pay off debt more quickly. This is because a larger share of each payment goes towards clearing the balance. The problem is that there is a huge temptation to spend the money that was saved online or when out shopping.
The Low Rate Balance Transfer Process
A zero percent balance transfer is only available to new customers with an excellent credit rating. Once accepted by the lender, that person completes a form that permits the new provider to initiate the transfer process. The fee for carrying out a 0% credit card balance transfer is normally 3% to 4% and will be added to the existing debt. After a period of approximately 30 days, the customer will receive notification by post that the movement of money has been completed.
How Much Could a Zero Percent Balance Transfer Save?
A low rate balance transfer will save the customer upwards of 10% per annum. This means that a customer with $15,000 of unpaid credit card debt can avoid paying about $1,500 in interest payments each year. Provided a good credit rating is maintained, performing a series of zero percent balance transfers can completely pay off debt.
Why 0% Balance Transfer Credit Cards Don't Always Help
- Leaving old accounts open. Whilst many consumers perform a low rate balance transfer to pay off debt, it often leads to the amount owed actually increasing. Failing to close down the previous credit agreement regularly leads to that card being maxed out as well.
- Lack of discipline. Paying off debt through a series of zero percent balance transfers will only work if the customer is extremely disciplined. The reality is that most people simply spend the money they have saved when they are out shopping or buying stuff online.
- Transfer fees. As well as spending the money saved, consumers often find that the 4% transfer fee actually increases the amount of unpaid credit card debt. This is rarely cleared by any future savings for the reasons outlined.
Is the Best Balance Transfer Deal Worthwhile?
Regardless of whether a low rate balance transfer is an effective way to pay off debt, it is a means of interest avoidance and should be taken advantage of whilst it is still available. Don't leave the old card open as it can prove too much of a temptation for all but the most disciplined. It may be more effective to perform debt consolidation.
Sources
Woolsey, Ben. (January 15, 2010). "Credit card statistics, industry facts, debt statistics." CreditCards.com.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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