If you are fighting with a high level of credit card debt, you have couple of solutions available. You can use a credit card to pay a credit card, though balance transfer. But, before deciding on balance transfer, or any other solution, you must gather enough information about the benefits and risk of each solution. Do not make any rushed decision just because you have seen some promotional offer. Try to understand each solution. Also, make sure that you understand the advantages and disadvantages of every solution. So, do you know what credit card balance transfer is? Are you acquainted with the basic advantages and disadvantages of balance transfer?
Balance transfer defined
Balance transfer is a process in which you pay off your outstanding balances on your old credit cards, and transfer the balances onto new credit card. It is usually used if you want to transfer your current credit card debt, onto new credit card with lower (even 0%) interest rate. Credit card balance transfer can also be used as a mean to gather multiple credit card payments, into one single monthly payment. Stated differently, it is one of the strategies to get out of debt faster. This can be done through consolidation of your credit cards debts. Hence, you have the possibility to pay off your new credit card debt in shorter period.
Advantages of balance transfer
Pay lower interest rate – on your new credit card. This is especially important if you have high interest rate on your old credit card. Thus, you are able to save money on interest rate charges when you make balance transfer. In addition, you can use the money saved toward repayment of the debt during the low interest rate period. This means that you can pay more than the minimum amount due on your new credit card. Therefore, you will decrease you debt level faster, since you make higher payments toward your outstanding balance. And not towards interest charges as you would otherwise do on your old credit card (due to high interest rate). This is highly possible if you qualify for a credit card balance transfer with 0% APR for a set period of time.
Get better terms on your credit cards – when applying for a balance transfer credit cards. You should always consider and be aware about the terms of your agreement. If you see that you can get better terms with credit card balance transfer then maybe you should go for it. You can find better terms not only from interest rate point of view. But also, the new credit card could have lower fees and longer grace period.
Consolidation of credit card debt – can be another advantage of balance transfer. There are different alternatives to debt consolidation, one being credit cards balance transfer. By going for balance transfer you can consolidate multiple monthly payments on different credit cards, into one monthly payment. Thus, you will increase your monthly cash flow. In addition, you could repay your debt faster because (if you qualify for 0% APR) you will have more cash available for repayment. That is, the money you save on interest charges. This is possible if you can obtain higher limit on your new credit card.
Eliminate high interest rate balances – in terms of debt you have accumulated from different usages of your credit cards. As a credit card holder, you should know that different APRs can be charged depending on what you do with your credit card. The credit card issuers can and will charge you different APR on balance for purchases, and balance withdrawn from ATM. Thus, consolidating this debt into balance transfer credit card can mean that you have lowered the APR you pay on different balances. In addition, this could help you to repay, or at least reduce, your credit card debt faster. This is so because you are eliminating the high interest rate balance. Consequently you have a certain period where no interest (or lower interest) will be accumulated on your credit cards.
Disadvantages of balance transfer
Paying higher interest rate – although you have the possibility to pay lower interest rate on your credit card balance transfer, it will not last forever. Meaning that if you fail to repay your credit card debt within the low or 0% interest rate period, you will be hit with higher interest rate. Usually, the balance transfer credit cards have much higher APR after the low interest period is over. So, try to repay your balance in full before the expiration of the introductory period. Therefore, you can decrease your interest rate charge on your new credit card. In addition, if you do not qualify for a low interest rate promotional period, then most certainly you will be charged with higher interest rate.
Balance transfer doesn’t come cheap – as with any other financial service offered by banks and other financial institutions, balance transfer is also subject to certain fees. This fee can be rather high for some balance transfers. Thus, you need to consider the fees as well before deciding whether to go for a balance transfer credit card or not. For the purpose of better understanding the fees, you should know that it can be anywhere from 3% to 5% of the balance transferred. Keep in mind that it doesn’t mean that it will eat up the saving on interest rate charges. On contrary, it means that you should calculate this expense when analyzing whether or not it is financially worth to do the balance transfer. Of course, there are promotional balance transfer offers, who do not charge a fee, if you meet certain criteria. For this reason you should shop around a bit to see all available offers.
Balance transfer could hurt your credit score – because your credit score is hit every time you have outstanding balance that is more than 30% of the credit limit. Positive aspect is that you could improve your credit score as you repay your outstanding balance, through on time monthly payments. In addition, because the credit card is a type of loan, it means that the lender would do hard inquiry. This hard inquiry will have negative impact on your credit score. Regardless of whether you will be approved for a credit card or not, you credit score could be decreased by three to five points. In addition, if you close your old credit card accounts, you will decrease the average age of your accounts. This, can further decrease your credit score. For this reason, try not to close your old accounts.
Risking to have more debt – temptation to continue with your spending habit could increase your debt level. When you make a balance transfer you will have higher level of credit available. If we assume that you do not close your old credit card, plus any credit left on your new credit card after the balance is transferred. If you don’t have disciplined financial behavior, you could end up spending the available credit. This means that you have increased your outstanding balance. Keep in mind that the low interest, almost always, is charged only on the balance transferred. Therefore, spending the available credit on purchases, would mean that you pay higher interest rate on the purchase balance. In addition, if you use your old credit card, you will drastically increase your debt. Consequently, all possible benefits from credit card balance transfer diminishes. Resist the urge to accumulate additional debt.
Not qualifying for 0% APR – many of the benefits arising from balance transfer can be gone if you are not able to get a 0% APR or very low APR for that matter. Thus, make sure that you are approved (not only pre-approved) for a low interest rate.
Lose the low APR period – if you fail to pay your monthly bill on time on your new credit card. Any late payment on your due amount, could result in losing the low interest rate period earlier. Go through your agreement carefully, and see in which circumstance the credit card issuer could end the introductory period.
Never, ever, make any decision if you do not have the adequate information. Always try to find and confirm the information about financial matters. Failure to gather adequate information can result in wrong decision, which in turn, can have adverse effect on your financial health. Balance transfer is one way to manage your credit card debt. Although it offers numerous advantages, it also has some drawbacks. Whether you will enjoy the benefits, or you will be hit by the drawbacks depends on the basis of your decision. Namely, it depends on how much information you have gathered before making the decision. For instance, let’s say you are hit with penalty APR. Do you know when this APR is charged or how much is it? If you fail to understand the penalty APR, you could end up with increased credit card debt. But, you should also know when the credit card issuer will charge you a penalty APR of almost 30%. You should know that failure to pay your monthly payment when due, will mean increased charges.
The penalty APR is only one example of what could go wrong if you fail to gather the necessary information. There are many other issues that could have positive or negative impact on your financial health. Thus, always make an informed decisions regarding your financial matters.