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Balance Transfer Credit Cards: Why deal with high interest?

Are you struggling with high interest credit card debts? You may have racked up charges or maxed out one or more of your existing cards and are now having difficulties keeping tabs of the payment due dates and making the minimum payment due on each card.

Transferring card balances to a single lower interest credit card may just be the key to get yourself out of the debt trap and help you achieve financial independence.

Balance transfer credit cards can have many benefits besides simplifying your monthly financial transactions and reducing interest charges on your debts.

Top 4 Balance Transfer Credit Cards

Visa Credit Card

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Visa Credit Card

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Visa Credit Card

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Visa Credit Card

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Balance Transfer Credit Cards Explained

Balance transfer allows you to pay off credit card debts by moving them to another credit card. The amount you can transfer and any related charges for the transaction should not exceed the credit limit of your balance transfer credit card. For instance, if your existing credit card balance is $7,000 and the credit limit of your balance transfer credit card is only $6,000, the amount you can transfer is limited to $6,000 less applicable charges, if any.

Card issuers may offer special balance transfer rates to attract card holders to transfer their business to them. Your card issuer may issue balance transfer credit cards offers for a limited time and you may have to decide promptly whether or not to take advantage of the opportunity.

A balance transfer offer will typically involve a lower interest rate than the regular rates charged by your existing credit cards. This can help accelerate your debt repayment time as more of the monthly payment goes to the principal. This may also mean lighter monthly payment amount.

Once your request for balance transfer has been approved, the card issuer will get in touch with your existing card issuer or creditor and make a one-time payment. The entire process may take one to two weeks. Hence, if a payment is due in a few days’ time, you have to pay at least the minimum amount due to avoid incurring late payment charges.

You may transfer one or more credit card balance to your new card as long as the total amount does not exceed your credit limit or the card issuer’s limit for the balance transfer offer. The limit is usually based on your credit scores and salary.

How can balance transfer credit cards offers help you?

A reduced Annual Percentage Rate (APR) can help you pay off your debt. Balance transfer credit cards typically offer low interest rates for a definite time frame like 12 to 24 months. Some may offer introductory APR of zero percent for a limited period. This will help you put more of your payment towards the settlement of your principal debt.

Introductory or promo rates may help shorten the time it takes to settle your debts. If you’re only paying the minimum amount due on your existing card, high APRs means a big portion of your payment goes towards the payment of interest charges and less towards the debt itself.

Consolidating your credit card balances into one balance transfer credit card will simplify your financial life because you will only need to keep track of one creditor and a single payment date each month instead of paying several credit card accounts on multiple due dates.

If you’ve been paying late fees or fines for missed payment, a once-a-month payment due date may help you stave off unnecessary fees that burn holes in your pocket and hurt your credit scores as well.

Types of Debts that You Can Transfer

You can transfer outstanding debts from different cards or loan facilities such as your existing credit cards, gas cards, or store credit cards. The card issuer may also allow you to transfer loans for appliances, car, furniture, or other instalment loans.

 

Types of Debts that You Can Transfer

 

You can transfer outstanding debts from different cards or loan facilities such as your existing credit cards, gas cards, or store credit cards. The card issuer may also allow you to transfer loans for appliances, car, furniture, or other instalment loans.

Balance Transfer Rates and Incentives

You card issuer may offer one or a combination of the following rates and incentives:

  • Introductory APR rates

Credit card companies will usually offer the best rates for balance transfers to new card holders. The offer may range from 0% to a low APR within a limited time period.

  • Incentives

They may also offer incentives such low interest rates on purchases to encourage new card members to move their business to them and perhaps build a lasting relationship.

 

What to Keep in Mind when Deciding on a Balance Transfer Offer

Before making up your mind to accept the card issuer’s offer for a balance transfer, take time to read the fine print. Here are issues that you need to consider:

A balance transfer fee may be charged to complete the process. It may range from 3% to 5% of the amount to be transferred. For instance, if the bank approved your request to transfer $6,000 to your new credit card account, you may be charged $180 (3%) outright.

Some balance transfer credit cards charge high annual fees. You can save some money by choosing a card that does not collect or charges lower annual fees.

You must bear in mind that the introductory rate is temporary. The promo period may only last as short as 6 months or as long as 18 months. It’s important to find out the time period specified in the offer and plan your payments accordingly to make the most of the balance transfer.

Once the promo period expires, any unpaid balance on your balance transfer amount will be subject to the regular APR for new purchases of the balance transfer credit card. In some cases, the new rate may even be higher than the original APR of the loan. You will ideally opt for a new card with longer promo period to make the most of the offer.

You may also be able to transfer your balances to a credit card with no promotional offer. Balance transfers of this type are usually subject to the regular balance transfer rate as defined in the Card Member Agreement.

Your existing credit card(s) may also have promo APRs that will convert your balance to a new principal with lower interest rates and lighter monthly payments for a fixed time period. You can get in touch with your card issuer before deciding on which offer will be more beneficial.

While balance transfer credit cards may offer zero percent interest on the balance transfer, card issuers may or may not charge new purchases with the regular APR. Hence, it pays to read the rules. In some instances, your new creditor may extend the zero percent promo rates to new purchases but only for a shorter duration such as six months.

Take note that payments are allocated. If you have both balance transfer amount at zero percent APR and new purchases at regular APR, you may run into complications. Card issuers basically can decide how they will apply the payments. While the law requires them to apply the amount in excess of the minimum payment due to the highest interest debt, it does not tell them how to apply the minimum amount due.

Most credit card companies will apply the minimum payment to the debt with the lowest interest rate first before applying the excess to the debt with the higher APR. This will prolong the repayment period and increase the financial charges of the high interest debt. You can avoid this scenario by refraining from using balance transfer credit cards for purchases that are subject to higher interest rates.

Performing a balance transfer can help you make a full payment on a loan account but the act itself does not automatically close your old account. You have to get in touch with your creditor and request for the closure of your account after transferring the entire balance.

Overall Impact of a Balance Transfer on Credit Scores

While a balance transfer can have many advantages, it’s important to understand how it will affect your credit scores.

Several factors determine the impact of balance transfers on your credit rating and they include the total transferred amount, the available credit limit after the balance transfer, and your actions afterwards.

For instance, if you’re paying off a debt in full through balance transfer and you close the cleared account after the transfer, the act will form part of your payment history and the old account can help determine the length of your credit history. Both are calculated into your new credit score. Likewise, paying off the transferred amount can help boost your score.

Credit scores provide potential lenders a quick way to assess your creditworthiness. They provide a measurement of the likelihood that you will repay your loans on time. An individual’s credit score is commonly based on factors such as credit utilization, payment history, credit inquiries, credit types, and the age of your accounts.

Credit Utilization: Credit usage comprises about 30% of your credit rating. Also called balance-to-limit ratio, credit utilization rate refers to the comparison between your total loan amount and total credit limit. In general, the higher the credit usage rate, the lower the credit scores. Maxing out your card balance will work against your credit scores. When you open a new balance transfer credit card and maintain the old credit card instead of closing it, your credit utilization rate will likely go down.

Payment History: Comprising about 35% of the total score, this factor is considered to have the biggest impact on credit scores. Payment history provides information on how consistently a borrower makes on-time payments to debts. Missing out on due dates and late payments can hurt your credit scores significantly. A single due date may help simplify your payment schedule and help improve your score.

Credit history: The age of your account or credit history generally consists about 15% of your credit score. People with longer credit history are likely to have better scores, all other factors being equal.

It is calculated by averaging the age of the oldest debt account and length of credit accounts. While doing a balance transfer between existing accounts are not likely to affect credit scores based on credit history, opening a new credit card account to facilitate the balance transfer will bring down the average age of your credit.

Credit Inquires

Credit Inquires: Credit inquiries typically account for 10% of your credit score. An application for a new credit card places a hard inquiry on your records which may create a slightly negative effect on your credit scores. However, making too many applications for new credit cards may adversely affect your credit scores and flag your account as a high credit risk.

When Doing a Balance Transfer is Not a Good Idea

While a balance transfer can have several advantages, it may not be advisable in the following instances:

You find it difficult to make the payments on your debt.

You have a tough time sticking to a budget and find yourself using your card to pay for your impulse purchases.

You have no plans to stop using your first card. You think that the freed up limit of your old card will give you more room to shop or pay for stuff that you can’t afford to pay in cash. You can rack up more balances and interest on both cards and this will place you in a worse financial situation.

It can be a good idea to do a balance transfer if you can actually save on interest charges, simplify your payment due dates, and pay down your debts faster. However, before you commit to your card issuer’s offer, make sure that the balance transfer will make good financial sense by calculating the related credit card fees and comparing it to the total charges that you would have incurred if you opted out of the offer.

Choosing the Best Balance Transfer Offer

The chance to pay off your debts at zero percent interest is just one of the perks that balance transfer credit cards offer. With the many offers being dangled by credit card companies, how do you choose the best balance transfer deal?

The following tips will tell you what to watch out for and help you weigh your options.

  • Opt for a card with the longest duration for introductory or promo rate.

Zero percent interest sounds enticing but you know that it will not last forever. The intro rate and the length of time you will enjoy the promo rate will usually depend on the specific offer and variables like your salary and credit score. When shopping for the best balance transfer credit cards offers, choose the card that will allow you to enjoy the promo rate for the longest period.

  • Choose a card with the lowest balance transfer fee.

Most credit cards will charge anywhere from 3% to 5% of the balance transfer amount. You have to carefully review your options and ensure that there are no hidden surprises. The fee is usually minimal compared to the high interest charges that you will incur if you choose to continue paying   your old high interest rate over the promo period. However, it may hurt your finances particularly if you intend to transfer large balances.

  • Opt for a Credit Card with Zero Annual and Overlimit Fees and the Lowest Regular APR after the Promo Period

Since you’re trying to pay off your debt, you wouldn’t want to incur more charges. Hence, it makes good sense to look for a credit card that does not charge annual fees, late fees, or overlimit fees or for a card that charges the lowest incidental fees.

Some cards may charge you a higher APR when you make one or more late payments. Hence, if you know you’re bound to pay late one of these days, it will be better to find a card that will not raise your APR when the situation arises.

  • Find out the Regular APR of the Credit Cards

When comparing between cards, it’s a good idea to know what the regular APR will be for each card at the end of the introductory APR offer. In case you fail to pay off your balance within the promo period, the unpaid balance will be subject to the regular APR. Hence, you must take into consideration how much the rate will be and which card offers the lowest rate.

To make the most of a zero percent interest credit card balance transfer offer, it’s a good idea to sit down and prepare a smart strategy towards gradually extinguishing your debts within the introductory period. You will have to calculate and set an amount that you can afford to pay consistently on a monthly basis. You need to anticipate seasonal expenses that may be necessary such as school camps, home or car repairs, or vacations.

To shorten payment time and save on interest charges, you may want to allocate windfalls or bonuses towards paying off your credit card debt.

Balance transfer credit cards provide an opportunity for debt-ridden people to make a fresh start. Paying off your debt requires a lot of discipline and control over your spending. The main reason why you want to take advantage of its benefits is to pay off your existing debts and to eventually lead a debt-free life.

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