The balance transfer game can be fun, until you lose the game.
A credit card balance transfer is a common way of avoiding interest rates. This is done by frequently moving your debt to new sources, chasing low introductory rates. While this can be an effective way to avoid excessive interest rates, it can be equally dangerous.
For consumers with excellent money management skills, balance transfers are a staple of their financial plan. In fact, some people even view it as a game, consistently tricking the creditors by never paying interest.
If consumers go down this path and an unexpected loss of income occurs, things can go sideways quickly. Low interest introductory offers are followed by a hefty interest rate applied to the balance when they expire.
If your income is reduced, or credit damaged, you may not qualify for that next credit card. This is where consumers can get into trouble.
What is a Balance Transfer?
When you possess high-interest debt on one or more lines of credit, a balance transfer moves that debt to a new loan or credit card with a zero or low interest rate. This rate is introductory, and generally expires one year from signing up. This tactic ensures all your payments are going to principle, and never accruing interest.
To be clear, a balance transfer does not reduce the amount you owe in any way. Instead, its purpose is to get a lower interest rate, save money on finance charges and pay off the owed amount faster.
In order to qualify for an unsecured credit card with a 0% interest rate, you will have to maintain good credit.
Transfer-fee on balance transfer.
Many credit card issuers offer 0% interest balance transfers, but some of them also charge a transfer fee. This fee usually ranges from 0–5%. It’s very important to fully understand the scope of the promotion. Make sure you ask the right questions, and stay within the guidelines if you choose to transfer.
Some good questions to start with are:
- What is the introductory interest rate?
- How long does the promotional period last?
- Is there a balance transfer fee? If so, what is it?
How do balance transfers affect your credit score?
Balance transfers are generally deployed as a way to avoid high interest, late payments, or to try to improve credit scores. It can be a good way to pay down credit card debt. But, it can either help your credit score or hurt it depending on several factors.
Applying for credit cards with low introductory rates can negatively affect your credit scores. While a balance transfer saves money on interest in the short term, if you falter, the credit implications can be severe.
Is it effective to transfer credit card balances or does it just prolong the inevitable?
So, is a balance transfer really worth it. A credit transfer fee between 3 to 5 % of the balance is charged by most credit card companies. For example, if you’re repaying a $15,000 debt, some balance transfer offers will add 5% ($750) to your total as a charge for the balance transfer.
Once the promotional period is over, the full interest along with any fees will begin compounding. In short, it’s a strategy that can help you save extremely costly interest rates. But, you need to be careful about details like fees, interest rates and other restrictions on transfer amounts.
Transferring a balance, of course, does not mean the elimination of the debt. Instead, moving the balance to a low-interest credit card is a temporary reprieve. It typically comes with fees, and interest will surely have to be paid on whatever balance is transferred.
The hidden trick behind these balance transfers is consistency. Without it, you may find yourself in a bind when the introductory 0% APR period ends. In order to avoid this, it is vital to pay off the entire balance during the no-interest introductory period, or, continue your transfer plan if you can keep it up.
Bottom line
Balance transfers can prove to be a good subway to consolidate the credit card debts and more quick payments, provided close attention is paid to the terms and conditions.
