In the credit card market, many lenders try to lure new customers by offering no, or low, interest periods in which to repay their existing credit card balance. This balance transfer period is sometimes referred to as an introductory period or honeymoon period.
How balance transfer works
When a consumer applies to transfer their credit card balance to a rival lender’s card, there is no guarantee that the entire credit card balance will be transferred to the new card. So if you have a credit card debt of $5,000 that you wish to transfer, you may only be eligible to transfer up to $1,000. In this case, you’ll be left with two credit cards – your existing card with a balance of $4,000 and the new card with a balance of $1,000 – and may have to pay fees for both.
Following the balance transfer period the low interest rate switches to a higher rate, also known as a revert rate. Revert rates can often be higher than the market average interest rate, so it’s important that you repay as much of the transferred balance within the initial low interest period to make it worth your while switching.
If you’re not able to repay your balance in this time, you may end up racking up a bigger interest bill than if you had opted for a low rate credit card from the start. Hypothetically, a zero interest credit card with a balance transfer period of six months may revert to a rate of 21 percent. By comparison, a low interest credit card may offer a rate of 9.5 percent from the beginning. So if you’re not able to repay your balance within 6 months, then the balance transfer card option may be more expensive in the long run.
It’s worth taking some time to calculate repayments and be realistic about the length of time it will take to repay your debt before switching to a balance transfer card. Also take into consideration the costs of owning the card, because establishment fees, annual fees and other charges can really add up. Finally, compare credit cards online to determine the most financially viable option for your situation and balance transfers if you are considering making the switch.