Are you knee-deep in credit card debts? If yes, then you should look for certain ways that will help you to repay your debts soon and with more savings. Trust me, credit card balance transfer is the best option to manage credit card debts and you may save from interest payments too.
If you want to choose this strategy and repay your credit card debts, then initially you can search for a suitable credit card with no balance transfer fee (you may have to negotiate with the new credit card provider). It will allow you to transfer your credit card balances into that card at a zero rate of interest.
What is a balance transfer and how does it work?
A balance transfer is similar to a credit card transaction where an user can move his/her credit card balances from one account to another. If you have difficulty paying off your high-interest credit card debts, you may choose the credit card balance transfer option and save a decent amount on the interest payment.
If you are doing this for the first time, then you might be a little confused about how to transfer a credit card balance properly. The answer is simple. Typically, when you transfer credit card balance to another card, it includes 6 important steps to consider:
- 1.Checking your existing credit card balances and current interest rates
- 2.Choosing a few suitable balance transfer credit cards as per your requirements to find a suitable one
- 3.Reading the fine prints and going through all the terms and conditions related to balance transfer
- 4.Applying for a balance transfer credit card
- 5.Contacting the new credit card provider to initiate the credit card balance transfer process
- 6.Paying off your credit card debts within the introductory period, once you transferred all the balances
In the balance transfer method, you can transfer all the balances that you have in your high-interest credit cards to the one with the lowest interest rate and a zero balance transfer fee. Once you transfer all of your credit card balances into that new balance transfer card, you have enough time to pay back all that balance, as during that time you don’t have to make those high-interest payments. You may grab a balance transfer card from any credit card provider at an extremely low rate of interest, such as 1% or 2%.
Sometimes credit card providers may offer you a 0% APR balance transfer card directly from their end. This would be the best balance transfer offer that you can get. Now you may transfer all the credit card balances from your high-interest cards without paying a single dollar as interest. Normally, The best balance transfer credit card may offer you a 0% introductory APR on balance transfers for 15 to 21 months. You should pay off your entire balance within that period, else at the end of the period, the rate of interest will rise into the normal rate, which is quite higher.
With the balance transfer process, a credit card user has to pay certain costs. Normally, it will have a balance transfer fee, 3% to 5% of the total balance transferred. And if you use that balance transfer card to purchase new items, then there will be another interest rate charged on that new balance.
What happens to your old credit cards when you transfer the credit card balance to another card?
Once you transfer your balances from one card to another, your old credit card accounts remain open. If the transfer was successful, the old cards will carry a $0 balance in them depending on how much amount you were approved to transfer to the new balance transfer credit card.
You can use those old cards just like before. But remember, you should stay current on your account by making regular payments on your credit card bills. This way you may avoid negative reports in your credit report by your old credit card companies.
Through a credit card balance transfer process, once you transfer the balances, your new credit card provider will make payments to your existing card companies. The amount will be equal to the balance transferred. It is good to keep your old credit cards open, as they are carrying a good credit history. But you may choose to close those credit card accounts if they have huge annual fees or offer big discounts to provoke you for overspending.
Is it a good idea to do a balance transfer?
If you think closely, transferring your credit card balances has both advantages and disadvantages. If you choose the best card and use it wisely, you’ll be able to pay off your credit card debts in full and save more on interest. However, you may also risk your finances if you don’t pay off your transferred balances before the introductory APR ends.
#Advantages of balance transfer
1) You may easily pay off credit card debts entirely –You have the chance to avoid credit card interest for 6 to 21 months. So, it is quite easier to pay off all the credit card balances within a short time.
2) You can save money on interest – Through a balance transfer credit card, you may transfer your high-interest debts and avoid paying interest for 6 to 21 months. By avoiding high-interest payments for such a long period can help you save a significant amount of money.
3) You can consolidate multiple credit card payments into one –If you have made multiple credit card payments each month, then by using a balance transfer option, you may easily reduce the number of payments. If you consolidate such debts into one, it will help you to maintain your monthly household budget and simplify your finances.
4) You can lower your overall monthly payment amount –If you have multiple credit card debts, then you might also have to pay a big amount towards those debts every month. It is because each credit card balance has its minimum payment limit, which you must pay every month. If you combine those minimum payment amounts together, it will be a big amount that can tear your monthly budget apart.
5) Improves your credit score –A balance transfer credit card can help you to boost your credit score. When you get a new balance transfer card, your credit utilization ratio will improve. It is because the new card comes with a certain credit limit and once you get the card, your total credit limit will be increased. If you pay off your balances within the introductory period, and without incurring further debts, your credit utilization ratio will fall quickly, thus improving your score.
By consolidating your credit cards through a balance transfer, you may also reduce the overall monthly payment amount. When you transfer the balances from all the high-interest rate credit cards to a low-interest rate credit card, the interest rate lowers. As a result, your monthly payment amount gets lower too.
#Disadvantages of balance transfers
1) You won’t get 0% APR with a low credit score – The credit card provider will offer you a 0% APR only if you have good or excellent credit (FICO scores of 690 and higher). So, with a poor or average credit score, you won’t get the best balance transfer offers to consolidate credit cards. If you somehow manage to get a card with 0% APR, you won’t be eligible for high credit limit.
2) You have to pay a balance transfer fee – Most balance transfer credit cards may need you to pay a 3% to 5% transfer fee upfront for transferring your credit card balances. The higher the balance, the higher the amount of fee you pay. You can grab a zero balance transfer fee offer from a credit card provider only if you have an excellent credit score and a good payment history. So, you should consider it while opting for a balance transfer to consolidate credit cards.
3) Introductory offers have a time limit – The credit card providers can offer you an introductory 0% APR with your balance transfer card. But remember, that offer will be valid up to a certain period (6 to 21 months max). After that, your entire balance on that card will be charged at high interest. If you don’t pay off your credit card debt within that period, you’ll be back to square one!
4) You might be dragged into more debt – Once you transfer all of your credit card balances into the balance transfer credit card, you might be attracted to make new purchases by using all other balance-free credit cards. As a result, your overall debts can increase. So, put away those cards for a while if you want to pay off your existing debts once and for all.
Do balance transfers hurt your credit?
Opening a new credit card will reduce your overall credit utilization. Your credit utilization impacts 30% of your FICO credit score. So, it will help your credit score to increase. However, when you transfer all the credit card balances into one new balance transfer card, it may increase your single-card utilization ratio. This may reflect negatively on your credit score. So, your credit score may drop in the beginning, but once you start paying off the balance, it will gradually increase.
It is best to avoid transferring balances to the new card’s full credit limit. As per FICO, a maxed-out card may cause a 45 point drop in your credit score.
Remember, while getting the balance transfer card, you’ll be hit by hard inquiries if you shop too much in a short period. But, fortunately, within a 45-day window, multiple credit card hard inquiries will be considered on your credit report as a single inquiry. So, apply only when you need the card urgently.
Are too many balance transfers bad for your finances?
If you transfer credit card balances multiple times in the new card, it won’t create any issue. But transferring credit card debts from one credit card to another may incur too much balance transfer fee for you. Also, you can’t transfer balances back and forth between two cards provided by the same credit card company, and your balance transfer request will be rejected. Most of the credit card companies have few restrictions on transferring balances between their accounts.
You can’t transfer credit balances greater than the new card’s credit limit. Unfortunately, you will know your credit limit when you’re approved for the new balance transfer credit card.
Can you cancel a balance transfer?
One important factor you should always remember. You cannot cancel or reverse your balance transfer request if the transaction gets completed. Yes, many companies can allow you to cancel or reverse a balance transfer, but for that, you have to be quick and inform them before the transaction happens.
Mistakes to be avoided while transferring a balance
Before you opt for this strategy, you must be aware of certain mistakes that people often make.
a. Not knowing the deadline on the credit card balance transfer offer
When you apply for a balance transfer credit card, the credit card company may provide you with special offers, such as low or zero interest balance transfer. Those offers may be available for 4 to 5 months, once you get approved. So, if you forget that deadline you’ll miss a golden opportunity.
b. Not going through the fine print
When you apply for a balance transfer card, you must check out the terms and conditions by reading the fine print. This will help you choose the type of balance transfer card that will suit your needs. Certain balance transfer cards have strict terms and conditions. For example, if you have taken out a card with an initial interest rate of 3%, it can get converted to 25% after 3 months. Hence, this will hinder the benefits of the transfer.
c. Not confirming that your other cards have $0 balances
Once you transfer your credit card balances to initiate credit card consolidation, make sure that your old cards have now $0 balances. It may happen that last-minute interests or fees will be charged to your old credit cards, that you might have missed. You should monitor your cards for a couple of months to ensure a $0 balance in every card.
d. Using the balance transfer card for shopping
When you take out a balance transfer card, you must not forget the fact that you’re taking out a new card at a low rate of interest to repay your debts soon. So, you should not make the mistake of using the new balance transfer card to purchase items. It’s because in most cases, the low-interest rate of the card will be charged only on your transferred balance, not on your new purchases. You’ll be charged a comparatively high rate of interest on your new expenses.
e) Paying the credit card bill late every month
Most balance transfer credit cards include a few special conditions where you may lose the introductory 0% APR. Paying this credit card bill late is one of them.
You might become confused that after transferring balances, is there any due date every month to pay a part of the balances?
No, there’s no fixed due date. You may pay off anytime within the introductory 0% APR.
Then, what kind of credit card bill are we talking about?
Some balance transfer cards come with the facility that you may use that card to make new purchases. The new purchases are considered as new credit balances with a certain due date to pay off.
If you don’t pay off that new balance within the due date, then the 0% APR will be revoked immediately and your transferred balance will be charged at the current purchase rate. Additionally, you could be charged with a big late payment fee. If your payment is over 60 days late, you might also get a penalty interest rate, which is often around 30%.
f) Taking out cash advances from the balance transfer card
Cash advances mostly carry a very high-interest rate (nearly 25% and higher). You won’t even get a grace period to breathe. So, avoid such steps which may only increase your debt amount.
Lastly, after transferring your balances you need to adopt ways to save money and reduce your expenses. This can be done in many ways but the best thing would be to reduce your everyday expenses so that you can save a little money every day. Walking for distances that can be walked instead of taking any mode of transportation, decreasing your utility bills by talking less on the telephone and using electrical appliances judiciously, cooking your meals at home instead of buying food, etc. can decrease the expenses you incur quite a lot. Thus you can pay down your credit card in a more convenient manner.