Have you ever been interested in a credit card because it promised you a great interest rate that seemed too good to be true? Most of us have jumped at one of these good deals at some point. There are more and more credit card companies that offer 0% interest on balance transfers or purchases, and sometimes these deals just seem too good to pass up.
These offers will be very tempting, especially if you have a big credit card balance and are paying a lot of interest on it. In fact, many 0% balance transfer offers will save you hundreds of pounds in credit card interest that you would have had to pay otherwise. But no matter how good these offers seem at the time, you shouldn't get another credit card unless you've looked over your finances and are sure it's the best financial move for you right now.
As a typical example, let's say you owe 1,000 pounds on a credit card with a 10 percent annual percentage rate (APR). This means that this balance will cost you 100 pounds in interest over the course of a year. Now, let's say you find a credit card that lets you transfer balances for six months at no cost. Well, it's pretty clear that 0% is better than 10%. If you took advantage of this offer, and there were no balance transfer fees, how much would you have saved after six months? 50 pounds is the right answer. But once the interest-free period is over, what will the interest rate go back to? You should think about this before you decide to get a credit card, not when the interest-free period is about to end and everything else is more important. Let's say, for the sake of this example, that the interest rate goes back to being 25%. This means that you will pay £125 in interest over the next six months.
Even though this is a very simple example, it shows an important point about balance transfers with no fees. In the previous example, if the customer had kept his 10 percent card, he would have paid £100 in interest over the course of a year. In the same time period, he paid £125 for a balance transfer that had 0% interest for six months but then went back to 25%.
Remember that just because a credit card has 0% interest does not mean it is the best deal out there. Look at the long-term rates the card will give you and compare them to the rates you already get from your credit card. If the rate you have now is better than the rate you will get from the new card after the introductory offer is over, you might want to stick with the card you already have.
So while this is going on, you won't be able to use the new credit card, but you'll know that the interest payments on the old debt are being saved.
