How to manage a new credit card after a balance transfer
You've conducted your balance transfer, but what now? Your old account won't automatically be closed. Here are some tips on how you can manage your new credit card and consolidate your debt.
Balance transfer credit cards can be an efficient way to free yourself from high interest and start consolidating your debt. Conducting a balance transfer is a simple process, but repaying your debt before the promotional offer runs out can be tricky. Here are a few tips to follow to ensure that your consolidation goes successfully and smoothly once you have transferred your balance.
Pay attention to the details of the promotional offer
There are a few key details of the offer that you should pay attention to after you have conducted your balance transfer:
Offer length. Transfer offers generally sit between 6 and 32 months. Once your card has been approved the balance transfer promotional period begins. The sooner you begin repaying your balance the longer you will have to take advantage of the low interest offer.
Set phone and calendar reminders to prompt you to make regular repayments and to flag how long you have left.
- Promotional rate. Most UK banks and providers offer cardholders 0% balance transfer offers, but if it does charge a low interest rate it’s important to understand how much your balance will grow each month and how you will need to factor this into your repayments. Creating a payment plan will help simplify the process and reduce your chances of failing to repay your entire debt by the end of the promotional period.
- Revert interest rate. Like all good things, the low promotional rate on your balance transfer doesn’t last forever. Once the promotional offer ends, the revert APR will kick in and start collecting interest on your remaining debt. The revert rate is generally the much-higher interest rate. To avoid growing your debt again with interest once the offer expires make regular repayments, don’t use your card for purchases and keep an eye on when the offer ends to ensure you don’t have a remaining debt at that point.
- Minimum repayment. You may have a 0% interest rate, but you will still need to make minimum repayments each month. How much you have to pay will vary from card to card, but this amount rarely allows cardholders to repay their entire debt by the time the promotional offer ends. You should aim to pay more than the minimum amount each statement period to avoid collecting high interest once the promotion expires.
- Work within a budget. Consider the size of your debt, the length of the promotion and the interest rate to calculate how much you will have to pay each month to ensure that your entire debt is repaid by the end of the offer. If not, your remaining balance will begin collecting the higher revert rate and you could get stuck in the debt trap once again.
Compare balance transfer credit cards
Decide what to do with your old cards
Opening a balance transfer credit card doesn’t automatically close your old accounts.
There is a lesser argument that you should keep old accounts open, because this keeps your debt-to-credit-limit ratio (also known as your credit utilisation ratio) lower, which is generally looked upon favourably by lenders. Keeping your old accounts open may even help your credit score in another way – by increasing the average age of your credit accounts. However, if an old card has a low credit limit, then it’s probably not helping your debt-to-credit-limit ratio significantly.
In most cases, you will want to close the old accounts straightaway, especially if they have a monthly or annual fee or if you might be tempted to use them in the future. Additionally, fewer cards are much easier to keep track of.
Using your balance transfer credit card for purchases: what you need to know
The sole purpose of getting a balance transfer is to consolidate your debt. Using your balance transfer card for making new purchases completely contradicts your debt consolidation aim. While you may be enjoying a break from interest on your transferred balance, your card may well charge a high rate of interest on purchases.
- Different parts of your card balance can be subject to different rates of interest. Balance transfer credit cards often charge high interest on purchases. Your repayments will automatically go to whichever debt is collecting the most interest, so it could mean your balance transfer won’t be getting paid off as quickly if you’re making higher rate purchases too.
- Cash advances are likely to incur a fee and a higher rate of interest. “Cash advances” are when you use your credit card to withdraw cash at a cash machine or to get cash back at the till.
- Interest-free days may not apply to your purchases. Credit cards typically come with around 55 days interest-free on your purchases. However, the interest-free days will not apply if you fail to pay off your purchases each billing cycle.
- If you anticipate using the card to make purchases, it may be worth considering a different type of credit card. Your options include a low or 0% interest rate on purchases card. Alternatively, if you want to transfer a balance, while making purchases, it’s worth looking at a”balanced” or “matched” credit card instead, which would offer a 0% interest rate on both purchases and balance transfers (although likely for a shorter introductory period).
After the offer ends
If you have found yourself with a remaining debt at the end of your promotional period, you might want to consider doing a second balance transfer to another provider. However, credit history that shows you were unable to repay your debt during the promotional period could cause lenders to be less likely to approve your application.
Applying for too many credit cards and rejected applications can have a negative impact on your credit file, so it’s important to consider what affects using a second balance transfer as a back up will have. Lower the chances of having a rejected credit card application by doing an “eligibility check” on the provider’s website first. This is known as a “soft search” which won’t impact on your credit history.
Balance transfer credit cards can be a worthwhile consolidation tool, but only when used properly. Plan your strategy, make regular repayments and follow the above simple tips to ensure you get the most out of your balance transfer.
To manage a credit card after a balance transfer requires a certain level of dedication and planning. Just getting the debt moved won’t be an instant goal, and smart budgeting is crucial to prevent you from falling into the same place you were before the transfer. Nail down your plan, and if you’re going to use a back-up card make sure to compare your options before securing it.
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