The Awful Truth About Credit Card Balance Transfers


Article; first published April 18, 2007

This article aims to tell you the awful truth about how banks apportion the month's repayment of interest by allocating various levels predicated on the different rates of interest that they charge, so that users of credit card balance transfers will invariably be punished for borrowing, whatever they do. It also shows why it is essential to replace that credit card once the introductory credit card balance transfers period ends.

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A premier finance supplier lately launched a television advertising campaign that focussed on the fact that most banks designate peoples' usage of their cards into particular groups then allocated a particular interest rate to each group. These hierarchies were based on the spending of typical card users. Such people include holders of credit card balance transfers.

If you go by what the advert is saying, most credit card companies accept the credit card user will begin usage of the new credit card by transferring a previous balance for an average period of 39 weeks. The deal will be at 0 per cent interest for that time. The credit card user will make a new purchase with this new credit card that will on average draw a rate of around fifteen per cent.

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The credit card holder may then use this credit card balance transfers procedure for getting hold of some quick cash with the same card (never a good strategy!). Your interest rate for taking out cash is higher than the rate for purchases, and this is on average between 17 per cent and nineteen percent but can be as much as 23 percent or even more than that.

Now here's where the financial trickery starts. When it comes to the monthly payment, the credit card balance transfers card lender will put the least expensive transactions at the top of the queue when the time comes to pay the minimum, or whichever level of repayment has been chosen.

Therefore the costlier aspects of your credit card account - usually the cash borrowing - is effectively ignored where it will rack up greater and greater amounts of interest, and where all that interest will be further compounded and carried forward when interest is charged to the existing debt (we all know how it works, don't we?)

Your average user of credit card balance transfers may believe that they are paying off the debt in a uniform way, and that if one type of cash attracts a higher interest rate then that will be balanced out by the goods purchase which will be charged out at a lower interest rate. But of course that is not what is happening. The fact is that the credit card company will always put the less costly portion first in the paying hierarchy, and allow the costlier elements to burn your money away.

These costlier elements will be last to be paid, and you are not in control of this. To take a typical example, for the nine month usage of an average credit card balance transfer's interest-free period all the payments will be used to pay the interest-free part while the more expensive purchase (or cash) borrowing clocks up the interest.

Crucially, the more expensive part of the borrowing will be at the back of the queue, clocking up the interest, and this is paid off last, if ever. Last of all to go will be the cash advance, with its massive 23 percent or whatever it is. The bitter irony here is that the longer the so-called interest free period of grace, the longer the length of time this amount is allowed to rack up the interest! Then when you add on the percentage charge that most credit card balance transfers nowadays charge for making that balance transfer, then you know why the banks are making so much money out of us.

The only answer to this is to get rid of the credit card balance transfers at the end of the zero interest period by transferring the entire balance to a new card. That is the only way to do it. To do otherwise is to invite a cycle of endless debt.

Gordon Goodfellow is an Internet marketer and technologist. His credit card sites automatically alert customers when their interest free period is about to end. See credit card transfers US, and the UK site is credit card transfers.


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