Why Do Balance Transfer Credit Cards Work?

How balance transfer credit cards work is largely fairly obvious: they are a way

of paying off a high-interest credit card debt on a low to no interest rate.

Why they work is another matter, however, surely the credit card provider is losing money on them?

There are three reasons why this is the case, which I'll go into below.

The first is that balance transfer credit cards tend to be suitable for those with good credit ratings in the first place.

Those who would be suitable candidates for Bad Credit Rating Credit Cards, for example, won't typically be eligible for this form of plastic borrowing.

In this case, balance transfer credit cards act as a lightning bolt to bring people to the card provider who typically run up large expenses on credit cards and will therefore be profitable customers in the future who are unlikely to default on their debts relative to other card holders.

In fact, in the wake of the credit crunch it has been increasing hard to obtain this form of card even with a relatively good credit rating.

The second reason is that 0% Balance Transfer Credit Cards tend to be promotional offers.

In the case of zero percent deals this tends to be over a few months - and in turn this can range from just three months right up to almost a year and a half or two years.

However long, however, the point is that that they do end and when they do the interest rate returns to a typical APR which tends to range from sixteen up to twenty-five percent.

In this case, the new credit card provider will collect the interest payments on the card debt even if the consumer ultimately moves the debt to another balance transfer or life of balance rate card.

Finally, balance transfer credit cards - like Instant Decision Credit Cards - tend to be the gateway drugs of the credit card world.

Since they require a good to excellent credit rating to obtain - and people tend to stay within one bank when obtaining a number of financial products.

The consumers who sign up for a balance transfer credit card are later likely to sign up for the 'big ticket' products such as mortgages, savings accounts and ISAs.

So, in all, there are three things the banks are interested in getting from you when you want to sign up for a zero percent but they all boil down to one thing: getting your money.

However, it's perfectly possible to avoid giving them what they want by understanding how the cards work and why.

by: Julia Cook

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