What You Need to Know About Balance Transfer Credit Cards Before You Get One

It just takes a vacation, an equipment purchase, or a change of home to push the average person’s credit to the very max. This coupled with unexpected expenses, irregular money flow can take a person from managing to under water in debt! Being in debt is no fun. High interest rates on credit cards, mandatory payment dates can quickly snowball into large amounts that overwhelm the user. So what does a person do in such a situation?

Consumers can opt for a balance transfer that can ease the pressure of debt. Debt-ridden users can pick and choose from a variety of balance transfer cards to reduce their debt over time. But how does that work? In a balance transfer, the consumer transfers their debt to a balance transfer card that charges a lower rate of interest on the balance transferred. This means when a payment is made towards the card more of the principal rather than the interest gets paid.

Balance transfers also enable consolidation of debt to take place. You can transfer your various debts onto a balance transfer card and pay it as one through equated monthly installments or EMI’s.

Balance transfer cards often advertise that they charge a 0% interest rate. This is only partially true. Balance transfer cards charge an Annual Percentage Rate or APR.  The APR is calculated on a compounding daily basis. Often, to encourage users to pick their balance transfer cards, they will offer a 0% APR. The 0% rate, however, is usually valid only for a short period of time, after which the standard APR will kick in. If you are disciplined and pay off the debt in this period it is highly beneficial in achieving the goal of being debt-free. If not the standard APR charges kick in.

Let’s look at the various charges applicable to a balance transfer credit card:

• An initial balance transfer fee, which is a % of the total debt being transferred
• An introductory balance transfer APR which is lower than that on regular credit cards. As mentioned above, this can sometimes be 0%. These are promotional interest rates that are offered to rope in new users.
• A purchase APR, which will be applied to the new purchases made using the balance transfer card.

With this in mind, you need to be careful while making new purchases on the balance transfer cards. The card issuer can charge a different and higher rate of interest on new purchases. Consumers are therefore advised  to clarify this before they make new purchases on their card.

What about reapplying for a new balance transfer card when your teaser rate period ends? Is that a good idea? No, not really. Multiple balance transfer applications can lower your credit score and is not advised.