What is a Balance Transfer?
A Balance Transfer is using a new credit card to move your credit from one card to another.
Why are they so Valuable?
If you qualify, Balance Transfer Credit Cards are a great way to manage your debts. By transferring your debt from a high-interest rate credit card to a card with a zero per cent APR for a set period of time you could be saving a substantial amount of money each month in interest payments. Theoretically, by making the same monthly payment, you could be significantly reducing the amount you owe.
What a Balance Transfers is Not?
A Balance Transfer is not a repayment of debt, you will still owe the same amount of debt.
Here is everything you need to know about balance transfers:
1. Don’t Confuse Transfer with Repayment
A balance transfer credit card allows you to transfer your credit to another card with a 0% APR that will allow you to save money in terms of the interest you have to pay on the debt. For an instance, let’s assume you owe an outstanding balance of $5,000 on your high-interest credit card and are you are paying interest at 19% interest and your monthly payments are $238. By transferring your balance to a 0% APR card for 21 months, if you continue to make the same monthly payments of $238, you will pay off your balance at the end of 21 months, saving you approximately $1,661of additional interest on your debt.
2. Consolidating Is a Good Idea
A balance transfer credit card not only saves you an additional interest on debts with its 0% intro APR for a minimum time period, it will also allow you to consolidate your debts from multiple other credit cards to a single card to paid once every month. This is one of the most desirable ways to manage your finances as you will have to keep a track of only one credit card at a time, potentially avoiding late fees.
3. The Balance Transfer Fees
Though several balance transfer cards may allow you to pay off your debts without paying the additional interest on them, there is almost always a balance transfer fees associated with the new credit card. While the balance transfer fees may vary from 3-5%, they are almost always less than the additional interest you will not have to pay due to the 0% intro APR.
4. Effects on Your Credit Score
Applying for a new credit card will require the institution to check your credit reports which will require a full credit history which may ultimately wind up affecting your credit score. Even if you are not approved for a balance transfer credit card, your credit score may take a hit.
5. Other Considerations
Though balance transfer credit cards give you an easy way to avoid the additional interest on your debts, through the introductory offer of 0% APR, the rate will only last for a specific amount of time. To receive the maximum benefit you will have to stay on top of your spending and the goal should always be to attempt to pay off your debts within the specific period or you will be once again subjected to the additional interest which may range from 15-18%, which also could be higher than you were originally paying. Another important consideration is that this balance transfer option may not be available again to you upon the expiration of the initial offer. Often times credit card companies may not continue to allow you to open new balance transfer accounts if you continue to have high credit card balances, so make sure you choose carefully when to take advantage of this option.
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