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IN short, you shouldn’t spend on a credit card that you are using for a life of balance transfer offer because any new purchases made with the card will be subject to different rates of interest and any payments made to your account will go towards repaying your balance transfer first.
How payments made to your account are applied
Credit card terms and conditions include a clause called the 'allocation of payments'. This clause sets out the order of transactions that will be repaid when you make a payment to your account.
The allocation of payments is almost always ordered with lower rate balances being repaid before higher rate balances; effectively this results in the transactions on which you pay the most interest are left on your account the longest.
What about 0% purchases?
If a life of balance transfer credit card also offers a 0% purchase rate – it is likely that payments will still go towards the balance transfer first, even though the purchases are on a lower rate.
This is done because the 0% purchase period will expire before the promotional deal on balance transfers, and, when it does, the purchases will revert to a higher standard interest rate.
This is most often seen on credit cards that offer 0% balance transfers for say 12 months and 0% on purchases for 3 months. Payments go towards the longest promotional balance first – balance transfers – so that when the 0% purchase period ends, they accrue interest at the standard rate while payments go only towards repaying the cheaper balance transfer.
Why do credit cards order payments in this way?
Simply, because it’s the most lucrative way for the credit card provider to manage your credit card.
Wherever shorter 0% purchase deals are offered alongside promotional balance transfers, it's simply an offer to try and lure unsuspecting cardholders to spending on a credit card they are using for a balance transfer.
The credit card issuer is aiming to get cardholders to also spend on a credit card they've taken out for it's balance transfer to increase their revenue through interest charges.
Are any balance transfer deals also suitable for spending?
There are a few credit cards that offer equal length 0% deals on both balance transfers and purchases. The equal length of the 0% periods make these offers suitable for both transferring to and spending on. See the best buy 0% balance transfer and purchase credit cards.
However, as these types of offer are less profitable for the credit card companies, there aren’t so many available on the market, and they’ll often have shorter 0% periods.
Of course, the other option is to simply take out a promotional balance transfer credit card for moving existing card debts on to, and if you also want a cheaper rate on your purchases, take out a 0% purchase credit card for new spending too.
How should I use a life of balance transfer credit card?
Life of balance transfer deals are a great way to get back in control of outstanding debts, benefiting from a much lower rate of interest until the balance is cleared in full.
Not only can these deals ease financial strain of outstanding debts, but with an interest rate more than half of most standard rates, the debt is can be repaid much quicker and with a much cheaper total repayment cost.
Any balance transfer credit card, however, should be used solely as a tool to repay your transferred credit card balance. New spending should be kept to a different credit card or debit card, and any cash withdrawals or foreign currency purchase should ideally be made with a debit card.
Keeping a balance transfer credit card with just a balance transfer on it will give you a better idea of how well you are repaying the debt, it will keep costs down and most importantly the promotional interest rate you took out won’t be affected by any ‘trapped’ higher rate balances added to the same account.
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