Whether you’re looking to save money, pay off debt faster, or both, a balance transfer can be a great solution to get ahead. The balance transfer is a highly valuable strategy you can use to improve your financial position. Credit card debt can be intimidating, especially when interest and related charges stack up. The balance transfer is a way you can take control over your credit card debt and begin to gain ground and get out of it. Knowing how to do a balance transfer may allow you to find a lower introductory APR that can help you pay off your credit card debt.
What Is A Balance Transfer?
A balance transfer is at its most basic the process of transferring debt from one credit card to another. The purpose of a balance transfer is to save on the amount of interest you’re paying each month by taking advantage of the lower rates you are transferring your debt into. It’s important to take note of the fact that a balance transfer is not the repayment of debt, but rather the shifting of debt from one credit card to another. The balance transfer can be a highly valuable asset in the management of your finances but must be used appropriately, underlining the importance of knowing how to do a balance transfer.
Key facts to keep in mind about balance transfers:
A balance transfer is an effort to swap a high interest rate for a lower interest rate to enable you to better manage your debt through lower interest payments. Additionally, the balance transfer is used to simplify your financial management through the combining of your many monthly payments into a single payment. When done effectively, knowing how to do a balance transfer gives you an additional tool through which you can successfully plan your finances.
How A Balance Transfer Can Help
Knowing how to do a balance transfer provides you with the ability to shift your debt from a high-interest account into one with a lower rate. The capacity to do a balance transfer is dependent on your credit score, and since the Great Recession, it has become more difficult to capitalize upon this option. If you are a candidate for the balance transfer option, however, it can be of great value in simplifying your debt repayment schedule, and can also save significant money in terms of interest payments.
Transfer To A Better Rate
The transfer of your balance from one card to another is an effective means of controlling the interest rates you are paying. Knowing how to do a balance transfer can be highly valuable in reducing your monthly interest payments. In effect, you are paying off the balance of one credit card with another, with the lower rate of the second card saving you money during the period of repayment.
For example, if you have been paying 13% interest on a $1,000 debt, you would have to make a monthly payment of $173.50 for six months to repay the debt. If you transferred that to a card with a 0 percent interest rate, your payments for those six months would be $167, saving you $38.50 in interest. Expanding upon these numbers to higher levels of debt reveals the significant monthly savings you may realize simply by paying less in interest.
Simplify Payments Through Consolidation
An additional benefit of knowing how to do a balance transfer is a simplification of your payments and their scheduling. When you have multiple credit cards each with a different due date and terms, keeping up and on track can be difficult. If card payment dates are missed, late fees accrue, leading to an increase in the cost of your debt. The transfer of your balances into a single card makes your financial planning easier, as keeping track of one payment is far easier.
Consolidate Overall Debt
The balance transfer can be used to keep other forms of debt beyond credit cards in order as well. A variety of debt instruments, such as loans for cars, appliances, and other monthly installment payments may be transferred to a no-interest balance transfer credit card through the use of checks from the bank issuing the credit card. Consolidating various forms of debt allows you to further simplify your bill payment schedule through pieces together many payments into the same credit card.
How to Do a Balance Transfer
Knowing how to do a balance transfer can be a highly valuable skill in the management of your finances. While good credit will help you exercise the option, ongoing financial management in all areas is essential to keep your credit positive and beneficial. To ensure that balance transfers are of benefit to your financial planning, keep the following factors in mind.
Be Mindful Of Fees
The opportunity to transfer debt from a high-interest account into one with a promotional period with low or 0 percent interest can be highly appealing. However, the fees associated with the transfer must be taken into account. The fees for doing balance transfers vary, although according to creditcards.com the most common balance transfer fee is 3 percent. This means that if you transfer $10,000 of debt from one card to another, you will immediately pay a fee of $300.
Balance Transfer Calculators
Given the potential of realizing significant fees through the use of a balance transfer, it is important to calculate the prospective results. A balance transfer calculator is a useful tool to determine how much you will save over the life of the debt in terms of the difference in interest payments. The amount of any balance transfer fees offset the interest saved, allowing you to determine whether the balance transfer is, in fact, worthwhile, as the fees could outweigh the amount in interest saved.
Be Mindful Of Expiration Dates
Knowing how to do a balance transfer is all the more valuable when you know when not to do a balance transfer as well. Balance transfer credit cards seek to attract customers by offering an extra low annual percentage rate (APR), generally between 0 and 5 percent. However, the introductory rate does not last, often limited to only 6 months or 1 year. After the introductory rate period ends, the rate often rises to 12 to 18 percent. While the goal of saving on interest rates is the goal of a balance transfer, the benefit is generally only for a limited time, so long-term planning is essential when exploring balance transfer options.
Carefully Read The Fine Print
In addition to higher rates, it’s important to look out for “go-to” rate options, through which a late payment may result in interest rates being hiked even higher. In addition to “go-to” options, the new interest rates are also sometimes limited in application. Some balance transfer cards provide an interest rate of 0 for debt that is transferred, but those cards may also have a different and higher APR for new purchases made on the card. Only the transfer may qualify for the lower APR, or it may apply to new purchase but only for a limited period of time.
Balance transfer options can additionally be complicated by the way payments are applied to the account. If a card has both a 0 percentage APR for pre-existing debt that was transferred in, and a different APR for new purchases, payments that are made are divided between the two. Generally, the minimum payment is applied first to the lowest interest amount, leading to an extension of payments for the higher interest-bearing debt, ultimately costing you more.
The Impact On Your Credit
While the purpose of the balance transfer is to reduce the cost of debt through a lowering of interest payments, it’s also meant to improve upon your financial standing. To do so, you must also take into account your credit score, which is impacted by balance transfers. Applying for new balance transfer cards when the introductory rates expire can damage your overall credit score, leading to you being seen as higher risk, making it harder to borrow money for big investments like homes and cars.
Knowing how to do a balance transfer can improve upon your ability to manage your finances. There are a number of options available, so consider how much money you want to transfer, and the options available throughout the many cards you may qualify for. Keep an eye on the duration of the introductory APR period, and whether it applies to new transfers as well. While knowing how to do a balance transfer will help you manage debt and the interest payments you make on it, an informed approach to all of your financial management is essential.
To keep on top of your financial management and to get your finances from “0” to “Hero,” keep checking back to the Wealth Maverick for ongoing tips and tricks to get ahead.