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.
So when you go selecting a balance credit card transfer don’t go with 0% interest rate offers alone because they usually last for short periods. Tabulate a comparison chart for offers with 0% interest and the interest beyond the promotion period vs the same rate of interest for the period of repayment before you take a decision. This is especially important if you feel you need a longer time frame to clear your debt.
Clarify if the same rate of interest is applicable on the balance transferred and on new purchases. Usually new purchases will attract a higher interest rate. So clarify before you decide to spend on new items apart from the balance transfer.
When you make a balance transfer from your credit card to a new balance transfer credit card, make sure your credit card balance stands at zero. Once you get the go-ahead from your old credit card company that all dues are paid focus on the dues in your balance transfer card, otherwise you will end up paying interest on your old card’s balance as well.
Comparing the offers on the various balance transfer cards is a good way to understand what offers are available in the market. Compare balance transfer cards here.
Financial discipline is paramount when going in for a balance transfer. Clearly, it is because the debt is overwhelming you are considering a debt consolidation tool like a balance transfer card. So make sure you make your payments on your balance transfer card on time and stay within budget. If you use the balance transfer card wisely you will diminish or clear your debt and you will find that you are on the way to save a part of your earnings. A balance transfer card must be seen as a breather or a lifesaver to get your finances back into shape and improve your credit score.