When people realise the high amount of interest they are paying on their credit card debt it is not uncommon for them to look for an alternative way to reduce the interest payable. This is one of the reasons for taking up an introductory offer of balance transfer cards. For this to be an effective way to reduce interest, care must be taken not to increase the debt level with further spending.
There are two different sorts of balance transfer credit cards. The first type usually has a zero or very low interest rate for an introductory period of a few months. The second type of balance transfer card still has a reasonably low rate, not as low as the first type, but it is based on a longer term. To gain benefits from either type it is important not to increase the debt by making further purchases with the card.
Another reason to avoid increasing the debt is that any additional purchases will be charged at a higher interest rate than that of the balance transfer rate. Many people make the mistake of thinking that the same interest rate is applied to any debt on the card but that is not the case, nor are any repayments applied to the higher rate first.
Confusion often arises in relation to the payment hierarchy applied to credit card repayments. For example if a $2,000 debt was balance transferred to a new card, and then a $200 spend was made, since 0% is payable on the balance transfer debt, the assumption would be that when a $100 repayment takes place each month this would be applied to the more recent debt. This is not the case. In reality if the higher interest rate equated to 20% you could end up paying over 40% on the original $200 before it was paid off.
This is the main reason you should avoid using your new balance transfer cards to make any purchases, as you will end up spending a lot of money in high interest rates, and lose the benefits of transferring the balance to reduce interest.
If you want a credit card for your spending, consider one of the other options available. Many credit card deals offer features or bonus points, which can be used for cash back or merchandise. These types of cards are more suited to spending than the balance transfer cards.
Even when you haven’t used the card much it is better if you can avoid spending. A card with no annual fee might be a good alternative for you to consider.
