All you need to know about credit card balance transfer!
Is it difficult for you to manage your multiple credit card bills? Are you forgetting the due dates of your multiple payments, and feel like having only one payment against all your credit cards? It will help you manage your payments… right?
If you're in this situation, you can decide to consolidate your credit card bills. The best option you have in hand is the Credit Card Balance Transfer.
Go through this article to know how to consolidate credit card debt with a balance transfer method. Also, listed here are the Do’s and Don'ts of Credit Card Balance Transfer.
It’s advised that you thoroughly understand them before initiating a balance transfer.
Balance transfer - What is the process?
You may have to take out a new credit card to repay your existing credit card debts. By transferring the balance from a high-interest credit card to one with a lower rate, you are, basically, paying back credit card "using the new credit card."
For example, if you are paying 13% interest for a debt amount of $2,000, then you'll have to pay $347 for six consecutive months. But, if you transfer the same debt amount to a 0% annual percentage rate (0% APR) card, then your monthly repayment amount will be about $334, thereby saving a neat $77 in interest, every month, out of the process.
According to Mike Sullivan, the director of education for the Phoenix-based nonprofit consumer credit counseling company, Take Charge America, the real and most definable advantage of a balance transfer card is that you save money in the long run, provided you repay the entire outstanding balance within the low introductory rate period.
Why is this offered?
Basically, credit card companies dole out these 0% APR cards or balance transfer cards out of their own business interest. Through these offers they want to attract fresh customers with somewhat good credit for the next 2-4 years and keep the existing ones hooked onto their cards, to ensure a steady stream of business trickling into their coffers. This helps them to beat increasingly-robust competitors. Moreover, you have to pay interest on the amount transferred, which is their income.
They do such business by offering credit cards at 0% interest rate (also known as teaser rates) for a definite, promotional period.
Still, due to reckless spending behavior, many customers fail to make timely debt repayments, particularly prior to the expiry of the promotional period. Hence, the creditors stand to make money from the interest paid by the customers.
Once the teaser rate period or the grace period is over, they levy different charges on the existing balance on the card. Also, some balance transfer cards are offered with T&C that different interest rates are charged for new purchases.
Also, you may need your creditors' approval to opt for the balance transfer to consolidate your credit card (cc) bills and pay them off.
Advantages of consolidating credit card debt with the balance transfer method
- You can repay debts at 0% or relatively lower interest rate.
- Consolidate and pay off your multiple cc bills through single monthly payments.
- You can manage your finances better.
- Your credit score may improve after paying off the entire balance.
- You can get away with predatory loan terms like high charges, poor grace period, etc., and get something much more convenient and helpful.
Disadvantages of consolidating credit card debt with the balance transfer
- The interest rate for a balance transfer (on a new purchase) may be more than the existing credit card interest rate.
- Usually, you have to pay a balance transfer fee, which is a percentage of the amount transferred. Add to this the annual fee of the card.
- You may not qualify for the 0% interest rate if your credit score is not good.
Do's and don'ts of credit card balance transfer
While trying to consolidate credit card debt through a balance transfer, you need to review its do's and don'ts.
- Check out the introductory period - It is important to know the introductory low-interest-rate period if you're taking out a balance transfer card for the purpose of consolidation. This is because you need to repay the remaining balance at a significantly higher interest rate, once the introductory period is over.
- Plan a budget to save more - It is quite important that you plan a suitable budget and try to save more every month. Use this money towards paying off your outstanding credit card balance. The faster you pay the balance amount, the more you'll be able to save.
- Compare offers - Before signing up for a particular 0% balance transfer card, you need to compare different card offers. The terms and conditions vary according to the companies. Some credit card companies may offer a longer 0% introductory rate period. The transfer fees and interest rates after the promotional period will also vary. Thus, it is wise to shop around for such offers.
- Check out credit score - Before applying for a balance transfer, it is better to check your credit score. If you have a low credit score, your application for the 0% balance transfer card may get rejected.
- Read the fine print - Before taking out the new 0% balance transfer card, read the fine print carefully. Check by how much the interest rate will increase after the 0% period. In addition, check the transfer fees. If needed, talk to the card company for explanations.
- Pay the balance transfer fee - You will be charged a balance transfer fee, which you are supposed to pay. This will vary from company to company. It is usually about 3% of the transferred balance.
- Spend lavishly - Don't start spending lavishly after opting for a balance transfer method. It is advisable to not use your credit cards until you clear your dues completely. Otherwise, you'll not be able to come out of the debt loop. And, most importantly, try to repay the outstanding balance as fast as you can.
- Close your old credit cards - After transferring your balance, you may decide to close some of your credit cards with high-interest rates. However, before doing so, check out whether or not they are your oldest credit cards. Closing the oldest credit card will lower your credit history. In turn, this may lower your credit score too. This is because your credit history is one of the major factors involved in credit score calculation.
- Don't forget to revise the transfer - After transferring the balance from the old high-interest cards to the 0% balance transfer card, check with the new creditor, and also the old ones, whether or not the money has been transferred properly.
- Don’t transfer online - Some credit card companies offer you to transfer the balance online when you apply online for a balance transfer card. However, you should avoid doing so; because you won’t come to know about the long term interest rate that will be charged after the balance transfer period. Moreover, the old credit card companies may not allow you to transfer the balance online.
- Don't use it for purchases - Don't use the 0% balance transfer card to make any purchases. If you use this card to make purchases, the creditor can charge a high interest on the card. Thus, you will be incurring a huge amount of debt.
Other methods to consolidate credit card debt:
- Consolidation program - If you enroll in a consolidation program, you can repay your multiple bills just by making an agreed-upon single monthly payment to the consolidation company.
A representative of the company negotiates with your creditors to reduce the interest rates. He/she also disburse the monthly payment, which you make, to your creditors as per agreement.
- Consolidation loan - A consolidation loan is like taking out a personal loan with which you pay off your existing credit card bills.
Thus, here also, you substitute your multiple payments with a single payment every month. You make this single payment to repay your new consolidation loan.
Once you're successful in paying back your entire credit card balance, use the credit cards responsibly. It will help you improve your credit score and enjoy a better lifestyle.
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