When your credit card is maxed out to the limit and a bank offers you a zero percent balance transfer, it might seem like a godsend. But while it is good in the short-term, how about the long-term?
With most UAE and Saudi credit cards charging APRs of around 30 percent, it might be wise to switch to a card offering nought percent on balance transfers, particularly if you have borrowed heavily on your existing card.
What this will do is give you some breathing space to pay down the debt and get yourself back into a situation where you pay off your credit card every month, rather than being charged high interest payments on outstanding balances.
Balance transfer fee
So let’s say you have US $10,000 on one card at an APR of 32 percent and US $5,000 on another with an APR of 34.8 percent. Now, if you shift those two balances to a card charging zero percent for six months, then you have US $15,000 in debt but no interest building up on that debt.
However, while this sounds good in theory, there are some catches. Yes, you can transfer your balance and not pay any interest on that balance for a period of time, but the new credit card provider will generally charge a balance transfer fee. This is a percentage of the debt you are transferring and while the fee varies between providers, it is typically around the three percent mark, so make sure you ask the bank offering the deal what their balance transfer fee is.
If we look at that US $15,000 debt mentioned above, a three percent fee means you pay US $300 on the US $10,000 you transfer across and US $150 on the US $5,000 you transfer across. So, while you don’t pay any interest for six months, you still need to stump up US $450 for the privilege of that deal – an amount that will be added to the balance of your new card.
Pay it all off
Whether or not it is worth paying a balance transfer fee to access a long-term, interest-free offer will depend on the amount you owe, and how long you are likely to need to pay it off. And this is the key thing here – when you sign up for a balance transfer deal, your primary goal should be to pay it all off before the deal comes to an end and the interest charges kick in.
If you haven’t cleared your balance or, even worse, have run up even more debt, you will have an even bigger financial headache.
This is where finding out what the interest rate will be on the debt once the zero percent period has expired becomes important. Signing up for a deal without looking at the long-term picture could cost you. So, like with any financial product, you can now compare all balance transfer credit cards on the market in the UAE or compare all balance transfer credit cards in Saudi Arabia.
While the APR on your new credit card might be lower than the rate you are already paying, it could also be higher. And while some deals guarantee a fixed rate, others leave it wide open with a variable rate so you might end up paying a hefty APR that is subject to market forces.
Effectively all that zero percent balance transfer deal is giving you is some respite from the charges before the next set kick in. And, if you keep moving your debt from one card to the next, all you are really doing is shifting that debt around and never paying it off. And each time you will pay another balance transfer fee and potentially, a higher interest rate too.
But if you think you can pay the debt off, then take advantage of the range of deals out there. Standard Chartered in the UAE, for example, is offering zero percent interest for six months; after that, you will be subject to a variable rate. And Al Jazira, Al Rajhi, BSF, NCB and Saudi Hollandi are all offering zero percent balance transfers in Saudi Arabia.
Bank check on finances
One other thing to consider when you apply for a zero percent balance transfer offer is that the bank will carry out a thorough check of all your finances to make sure you can actually repay the debt. So, if you have missed any payments in the past, you might not qualify for the new card.
Also, if you fail to manage your repayments on a new card, that zero percent deal might be taken away from you, leaving you with a much higher APR sooner than you had planned.
Finally, be aware you will not be allowed to transfer your balance to a zero percent deal offered by your existing provider.