If you are struggling to pay off credit card or loan debt and frustrated by high-interest rates, you might be wondering if a balance transfer is a good option for you. In this post, we will discuss how balance transfers work, as well as the advantages and mistakes to avoid when making balance transfers.
What is a Balance Transfer?
A balance transfer is a popular way for consumers to pay down debt. To do a balance transfer, the borrower applies for a new credit card that offers a low introductory APR on balance transfers. Upon approval, the balance is transferred from the old card or loan to the new card. Now the debt can be paid down faster because the borrower isn’t spending extra money on interest.
Advantages of Balance Transfers:
Save Money on Interest
Of course, the biggest appeal of a balance transfer is the savings. Many new credit cards have attractive balance transfer offers with annual percentage rates as low at 0% for an introductory period that can range from 6 months to 24 months. If you are able to pay off the debt completely within this period of time, you can avoid paying interest and save a great deal of money.
More Credit Card Perks
While we don’t recommend taking on more debt before you have paid off your current credit card debt, there may be other perks to your new card beyond the low introductory rate. In addition to lower interest rates, some cards offer cash back on purchases or rewards that extend beyond the promotional period. This new balance transfer card could become a good card to use regularly, once your balance transfer debt is paid off.
Consolidate High-Interest Debt
Many cardholders struggle just to make the minimum payments on several different credit cards or loans every month, making little or no progress toward their goals. If your new balance transfer credit card has a high enough credit limit, you can transfer multiple balances to one account. This way you only have to make one payment per month and can focus all of your efforts on paying down one balance as quickly as possible.
Improve Credit Utilization
While your credit score may decrease slightly when the credit card company runs your credit report, opening a new balance transfer card and paying down the debt will lower your credit utilization rate. This means you are using less of your available credit, which improves your overall credit score. Of course, if you make a habit of constantly opening balance transfer cards and moving debt around without paying it off, this will hurt your credit score more than it will help.
Avoid Balance Transfer Mistakes:
Balance Transfer Fees
When you make a balance transfer, most card issuers require you to pay a balance transfer fee that can range from 3–5% of the amount being transferred. Since interest adds up quickly, the transfer fee is usually less than the interest you will pay if you stick with your current credit card, but it’s a good idea to check. Look for a card with no annual fee and a 0% introductory APR on balance transfers to save the most money.
Maintain Good Credit
To be approved for the best balance transfer credit cards, you will need good credit. If your credit is less than stellar, you may not get the line of credit or intro APR you are looking for.
Don't End Up with More Debt
If you don’t make a plan to pay off your debt within the introductory period, and you don’t avoid taking on additional credit card debt, you could wind up even further behind than before your balance transfer. Even if your new card offers 0% introductory APR on new purchases, try not to use it until your debt is either gone or manageable.
If you have good credit and a solid plan, a balance transfer can be a great way to save money on interest and get out of debt. For credit cards with great rates and no annual fees, visit today.