A balance transfer is a very useful tool when you have several credit card debts and you want to repay them faster. This strategy allows you to transfer the balance of one credit card on another with a 0% introductory APR offer. Depending on your financial situation, this might be an opportunity for you to repay other balances faster or even eliminate them completely. However, there are also some drawbacks of a balance transfer. Let’s see the pros and cons of such a financial strategy so that you can take an informed decision.
Balance transfer pros and cons
When you transfer the balance of one credit card onto another, you will get some benefits, such as lower interest rates on your balances and the chance to lower your monthly instalments as well. However, you will also face some drawbacks such as paying a balance transfer fee, possible impact on your credit score, and the fact that you have to transfer your debt. Let’s see the advantages and disadvantages of a balance transfer. - Advantage - Lower interest rates: By transferring your balance to a lower interest rate, you can save yourself a lot of money in interest payments. - Advantage - Ability to pay off more: By transferring your balances to a low interest card, you can pay off more of your balance every month and get out of debt faster. - Disadvantage - Possible drop in credit scores: Your credit scores are used to evaluate your financial situation. A balance transfer has the potential to lower your credit score.
How to do a balance transfer?
Let’s say you have a credit card with a $3,000 balance and an interest rate of 14%. You want to transfer this balance to another card with a 0% introductory APR offer. There are three main steps to do a balance transfer. First, you need to choose a card from a financial institution that allows balance transfers and has 0% intro APR. Second, you need to call the customer service of the credit card company and let them know about your intention. They will put an “authorization” on your credit. This means that the card is “disabled” temporarily until you transfer the balance. Third, you need to transfer the balance and make the payment.
What is the duration of a balance transfer offer?
Balance transfer offers have a specified duration within which you can transfer your balance and have a 0% introductory APR. The duration of such offers is usually between 12 and 24 months. The rule of thumb is that the longer the duration, the lower the interest rate is. For example, if you have a $10,000 debt and you want to transfer it to a 0% intro APR offer lasting 18 months, you would need to pay $200 for a BT Fee. If the duration of the card’s offer is 24 months, the BT fee would be $50.
Who can benefit from a balance transfer?
If you have several credit card debts and you are having difficulty repaying them on time, you can also transfer their balances from one card to another with a 0% introductory APR offer. This is because you can repay them with the new card as soon as it is activated without incurring interest charges for a certain period of time. You can benefit from a balance transfer if you have a very high credit card balance, a high credit utilization, or a high interest rate. Credit card companies usually allow you to transfer the balance only once and for a certain period of time, usually between 12 and 24 months. Therefore, it is important to take advantage of the 0% APR offer and pay off your debt as soon as possible because you will start incurring interest charges again after the 0% period ends.
Balance Transfer Fee (BT Fee)
Balance transfer fees are the fees charged by credit card companies when you transfer the balance of one credit card onto another. This fee is usually between $5 and $50. The duration of the offer (12-24 months) and the balance you transfer, are among the factors that affect the BT fee. You should know that even if you transfer a higher amount, the BT fee is the same. For example, if you transfer a $10,000 debt and the BT fee is $50, you will pay $10,000 + $50 = $10,050. Therefore, you should be careful when you decide to transfer balances from one card to another because you will pay interest charges from the moment you make the transfer. At least, the duration of these charges is 12 months.
Negatives of a balance transfer
As we have seen above, a balance transfer has several advantages. However, there are also some negatives associated with this strategy. For example, a balance transfer negatively affects your credit score. This is because the credit card company will “report” the transfer to the three credit bureaus. Another negative of a balance transfer is that you will pay more interest on your balances. This is because the new card has a higher APR than your previous one.
Credit card balance transfers are a great way to save money and get a lower interest rate on your debt. However, you should be careful not to transfer your debt from one card to another and keep using the cards to spend more than you can afford to repay. If you use a balance transfer to pay off your debt, you should try to pay off the debt as soon as possible so that you do not incur interest charges.