Why Cash Back And Balance Transfers Don't Mix

Two of the most popular and widely promoted kinds of credit card offer of recent years have been 0% balance transfer deals, where you can avoid interest on your debt, and cash back, where a small percentage of everything you spend is credited back to your account.

Both of these can offer significant benefits to the cardholder if properly exploited, so if you came across a card offering both cash back and balance transfers you could be forgiven for thinking that this could well be the perfect credit card. In truth, these are two card benefits that really don't sit well together, and to understand why we need to look at how credit card companies view your debt.

Your Card Statement

When you receive your statement, your balance is shown as a single figure, and hopefully not too large a one! Your card issuer however has a slightly more complex view of what you owe. Your balance is actually made up of several separate debts, each being charged at a different rate of interest. For example, your balance transfer debt will be being charged 0% interest, your purchases 15.9% (for example), while any cash advances will probably be being charged a rate nearer 30%.

How Your Balance Is Repaid

Why does this matter for cash back? Well, in a typically sneaky move, the card issuers apply your repayments to your cheapest form of debt first under a system known as allocation of payments. So, if you have £1,000 in transferred balances, and £500 in spending debt, that £500 will not be reduced by your repayments for as long as you still have some of that £1,000 debt remaining - it will be sitting in your account happily attracting interest.

Cash Back Swallowed Up

This is why cash back and balance transfers don't mix. Even though you might earn up to 3% cash back on your purchases, everything you spend will be costing you much more in interest for as long as you have some of your balance transfer not paid off, even if you credit your account monthly with the amount you've actually spent.

The message is clear: if you really want to profit from cash back and balance transfer deals, make sure you do each one on a different card, or your cash back earnings will be totally swallowed up by interest charges.

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