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Managing your credit card balances

Managing your credit card balances

Anyone that cannot pay off their credit card balance in full every month should put some serious thought into taking up a special credit card offer to help them out. Credit card companies will charge interest on any outstanding balance on an account. Although this may not seem like a big deal the interest that can be added to the balance can soon mount up and can make it harder to pay off the money that was originally borrowed.

There are various types of credit card offers that can help out here. Most will give you a way of reducing or freezing the interest percentage that is charged on the money that is owed. Card providers work out how much to charge in interest over the course of the year in the form of an APR -- Annual Percentage Rate -- and APRs can vary widely across the industry. So, one of the first things to look out for is the standard APR when comparing credit card offers as the card provider will charge at least this rate (if not higher) once any special deal has finished. Obviously, the lower the standard APR, the better.

The most popular types of credit card offers that can help in managing your balance are balance transfers and discounted rates. A balance transfer offer allows a credit card user to switch the balance(s) from one or more cards to another card where they will be given a preferential rate of interest. One of the most common deals is the 0% offer. So, for example, a card provider with a balance transfer deal of 0% for six months will commit not to charge any interest on the balance that was transferred for that six month period. If you think that you will carry on spending on the new credit card account then look for a balance transfer deal that also gives a preferential or zero percent interest rate on new spending as part of the deal.

Discounted rates, as you might expect, simply cut the interest percentage that will charged for a specified period of time. Once the deal is done the card will revert back to the lender's standard APR. Deals here (as with balance transfers) can be found for varying periods of time. Common time scales include three, six, nine, twelve and eighteen months.

It is essential to read the terms and conditions of any deal before making an application for the card as there may be hidden costs and conditions. First of all check the APR rate that will be charged once the deal has finished. An excessively high APR will not help you save money overall even with a 0% interest balance transfer in the beginning as the interest charges will soon start mounting up again. Also, think carefully about how high your balance is and how long it will take you to pay it off. If you estimate that it will take you a year to repay your balance on a 0% deal then taking out a deal that lasts three months won't do you much good.

Bear in mind that these offers don't all come for free. If you are thinking of taking a balance transfer deal then you will probably have to pay a fee to set it up. This will usually be charged as a percentage of the sum(s) to be transferred which will be added on to the balance once the card account has been set up.

Many people nowadays use credit card 'surfing' to manage their balances. Here the consumer switches from one offer to the next as the deals finish in order to get consistently good deals. The danger with this kind of move is that you can be branded a 'rate tart' by card providers and other financial institutions which may, in turn, have an adverse effect when you apply for other financial products including perhaps a mortgage or remortgage in the future. There is thus a fine line between wise management of your balances to minimise interest charges and 'rate tarting'.

Perhaps more importantly, applying for a lot of new credit cards or accounts in a short space of time can severely damage your credit score. Every application will show up as a 'footprint' on your credit record which will be visible to financial providers when they check you out. If you have made too many applications then they may assume that you are a high risk and you may find that they turn you down on that basis alone. It is better to ask for detailed quotes and illustrations from card companies for a given deal before making an application as these don't find their way onto your credit history.

Thus, if rate surfing seems appropriate for your circumstances, then there are measures you can take to protect your credit rating. Keep actual applications to a minimum and always look to existing card providers for balance transfer deals before applying for a new card: many will have loyalty departments who are there to maximise existing borrower value. It is also of paramount importance to show that you are a reliable and low risk borrower. So, don't miss payments on any financial product or make them late.

Also remember that with almost all balance transfer deals, any late or missed payment will nullify the deal, with the card provider immediately reverting to their standard APR (or higher) and interest thus accruing.

Finally, think hard about how and when you use your credit card(s). They may offer a quick and easy solution to spending but sometimes it can be hard to remember that we are not spending money that is in the bank. Every transaction you make on a credit card is borrowing and unless you repay the money you spend in full upon receipt of the card statement then you will have to pay interest on top of the money you owe.

Some people find it helpful to keep their credit limits low -- even if this means regularly lowering them when the credit card company raises them automatically, as they so often do. It's also important to make sure that you budget your finances in general -- this will give you a good idea as to how much you can actually afford to spend on a given credit card at any one time.