In the controversial world of credit cards, people of all ages are lured into cards with high interest rates. All the while, these innocent people are blinded by the fact that they are able to spend money that they cannot rightfully afford; and are expected to pay back more than they borrowed.
We are all guilty of falling for the luring temptation of a credit card, until the debt has begun to rack up so high we instantly regret the decision and become overwhelmed. Luckily, a solution has arisen and it’s something called a balance transfer. Your debts can simply be transferred to a different credit card with 0% interest or a small one-time fee.
What is a Balance Transfer?
A balancer transfer is when you consolidate and switch your debts to another credit card. The card is often offering a promotion of 0% interest for a certain period of time, sometimes 12 to 18 months. After doing thorough research and reading all of the fine print, you can find an appropriate company and simply call them to start discussing the possibilities of transferring your debts.
While some balance transfers do charge a fee, it averages around 3% which is often way less than your average interest rate. Depending on the promotion and the credit card company, you may be able to transfer one or more debts to the new card. There are a few obstacles you may run into along the way that can be easily avoided once you are aware of them.
Avoid the Trap with a Previous Balance
If you decide to transfer some, but not all of your debt from one card to a 0% interest card you could end up losing money in the end. To avoid issues associated with this, you should complete a balance transfer with an entire amount, not a partial amount. For example, if you owe $4,000 on a card with a 16% interest rate but only transfer $2,000 to the 0% balance transfer card, this could be a careless mistake.
The entire debt of $4,000 may still be subject to accruing the same 16% interest, despite the balance transfer of half the funds. Simply, only transfer the balance to a card that will accept the entire previous balance.
Credit Card Rewards
Some people transfer balances intentionally to a card that offers rewards or points that can be redeemed. This can be beneficial in the example of retrieving airline miles, if the interest rate is lower than that of the previous card. What you must use caution with is in regards to the amount that was not transferred over, because new purchases will still be accruing interest on the old card, while you have to pay off the new debt on the rewards card.
Balance Transfer Can Impact Interest
To stay in a safe zone, be sure to stay below 25% of your maximum credit limit on all of your cards combined. Your credit score is in part based upon how close you are to spending your available credit. Lenders see if you are borrowing more and more, and repaying less and less. For example, if I have a credit limit of $20,000 between all of my credit cards combined and my current debt is $6,000, I am using 25% of my allotted credit. This would be on the cusp of the preferred area in terms of borrowed quantities, this may lower your credit score and increase your interest rates on your current cards.
Fees
In some circumstances you can find a no-fee balance transfer. In most cases the average fee is around 3% of the amount of debt being transferred. There is usually a maximum amount of debt that can be transferred, as well as a maximum fee that usually caps off at a certain amount. For example, if you want to transfer $10,000 in debt but the maximum transfer fee is $150. The good news is you would only have
Is my Debt Worth Transferring?
If you have multiple credit cards with various balances, as high as $5,000 to $10,000 with interest rates from 8% to 16% it may be worth transferring your balance. Keeping track of multiple payments now just simplified itself into one payment with a smaller amount of interest.
While it is best to pay off the new transferred balance in the promotional period of 0% interest, if the interest rate thereafter is lower than your 8% to 16%, it will still be beneficial and save you money in the long run.
The best option to transfer and get rid of debt is at a time when you are financially able to meet one payment per month for the time frame of the promotion, being sure not to miss any payments and extend past the promotional period.
What are my Other Options?
If you are not ready to commit to a balance transfer just yet, there are some other options to help you get your debt under control faster. Start off by paying off your credit cards with higher interest rates before the others, while making at least the minimum payment on the rest. Another method is to negotiate interest rates with your credit card lender; more often than not they will be willing to lower your interest rate while you continue to pay them off in order of decreasing interest.
Conclusion
Gather all of the information pertaining to your situation before making the big move on your debt. Be sure to read all of the fine print, checking prior and future interest rates on the old cards and on the new cards. Balance transfers can save you thousands in interest rates, if you are ready to commit to making the consistently monthly payment in the given time period.
Use a convenient balance transfer calculator to see if it makes sense for your situation, by calculating the balance transfer fee in comparison to what you would pay in interest. In the end, so many of us have fallen for credit card debt at one point in our lives. Once you gain control, use caution that you do not fall right back where you were.