Taming the Plastic

Credit ControlUsed correctly, 0%- or low-interest credit card balance transfers can be an extremely effective tool in paying off credit card debt as part of a planned personal budget.

High interest debt is a bit like sugar in our diet, with credit cards being the financial equivalent of high-calorie desserts.

Of course, just like a sweet treat, credit cards do have their place. Once card repayments start to dominate our finances, though, it’s like sitting down to an entrée of cherry pie, a main course of sticky date, and a desert of chocolate gateau. That once mouth-watering credit card quickly becomes a sugar overload, leaving our finances in a dizzy spin.

After a successful balance transfer application, it’s generally best to go cold turkey with the new card. Avoiding plastic purchases makes sense for two reasons.

Firstly, purchases tend to attract a higher interest rate than balance transfers.

Secondly, most credit card providers employ a ‘negative payment hierarchy’, which ensures that any credit card repayments are used to pay off the lower interest rate items (the balance transfer debt) first, before paying off the higher interest rate items (purchases). By gradually paying off the balance transfer amount over the period of the offer, therefore, the danger is that any purchases which were made using the new card are left to accrue interest during that time. Potentially giving rise to a sickening case of ‘credit reflux’.

Ensuring the new card knows its place (usually in a shoe box!) as part of a well-managed personal budget really is the way to go. That’s when balance transfers become a recipe for a balanced financial diet.

David Rankin is an author, public speaker and founder of the personal budgeting service Sort My Money. This article does not offer personal financial advice.