Credit Card Balance Transfer

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How Credit Cards Work: Balance Transfers

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You may come across offers from credit card providers offering zero or low interest rates on balances transferred from other credit cards or store cards. You can usually opt to transfer all or part of your balance from your existing card to the new one, depending on the credit limit available on your new card.

Not only can this reduce your interest bill, it also lets you manage your card debt more effectively if you have more than one card, by combining your debt and paying it off at a lower rate.

The introductory ¡®honeymoon¡¯ rate is generally very low ¨C even zero, and it lasts for a specific period, usually around six months. After this, the interest rate on the amount transferred reverts to the card¡¯s ongoing rate.

The amount you will save with one of these offers depends on the rate applicable on the new card compared to your old card. For example, transferring a card balance of $2,500 from a card charging 16% p.a., to a card with a honeymoon rate of 4.5% for the first six months could see you save $141 over the period.

There are some traps with balance transfers though. Check the interest rate that applies to ongoing purchases on the new card. If it is significantly higher than the rate charged on your existing card your savings could be quickly eaten up by higher interest charges. Be aware too that balance transfers don¡¯t usually attract reward points. Always check the time period of the balance transfer interest rate as not all offers last the life of the balance.

The new card issuer will pay out the balance on your old card (it appears as a cash deposit on the card statement), but only you ¨C the cardholder, can close the account. It¡¯s your choice to do this, but arming yourself with more than one credit card could just mean racking up more debt.

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