If you have piled up debt on your high-interest credit cards, then it can be a good option for you to take out a new card with a low rate of interest and transfer all the outstanding balance of your existing credit card. Balance transfer method will make your monthly payments much affordable and will help you reduce your credit card debt.
However, before you make the big switch, you should know the ins and outs of balance transfer method that will help you make the right decision.
Why does transferring the balance to another credit card is beneficial?
1. Helps you save money
When you’ll transfer the balance of your higher interest credit card to your new balance transfer card with a low rate of interest, you have to pay less amount on interest payments and will be able to save in the process.
For example, if you were paying 10% interest on a $3000, you have to pay $300 per year as interest. Whereas, if your balance transfer card charges you 3% interest, then you need to pay only $90 per year as interest. So, you are saving $210 in the process.
However, you should repay the existing balance within the low introductory period to avoid paying much higher interest on the remaining balance later.
2. Simplifies your payments
Transferring of all your credit card balance to your new balance transfer card will simplify your payments. If you have multiple credit cards, it may be difficult for you to pay even the minimum on all your credit cards and will often accrue late fees. This balance transfer method will help you transfer all your credit card balances to one single card, which will enable you to keep track of your monthly payment dates and avoid late penalties.
3. Helps you repay other types of debts
It is not true that you’ll be only able to transfer your credit cards’ balance to your balance transfer card. You can move your other loans (auto loan, personal loan, etc.) to the low-interest balance transfer card and pay off your debts easily.
How will you do that?
For example, in case of an auto loan, repay the remaining amount with a credit card and then transfer the balance to the balance transfer card with a comparatively low interest rate.
Why you should think twice before saying "yes" to a balance transfer card
Balance transfer rates are not applicable for new purchases
You should always remember that you have taken out this low-interest card just to repay your existing debts successfully. Hence you should not use this card for shopping new items as it will charge you a high rate of interest. You should know the fact that you can take advantage of the low rate of interest on your balance transfer card only for the balance that you have transferred.
You will get better interest rate if your credit score is good
It is important for you to keep a good credit score so that you’re able to take out a balance transfer card with a low rate of interest. If your credit score is good, you may get attractive offers. If you qualify for this, you’ll be able to save significant money that will help you repay your credit card debt easily.
Expiry of the low introductory rates
Initially, you may feel excited about the low-interest rates on your balance transfer card. But there is a catch; the fact is that you can take advantage of the benefit within the stipulated time period that is provided to you to pay off your debt. If you’re unable to repay your debts within the time period, then the interest rates will get higher, perhaps even more than the interest rates that you were paying earlier.
It can affect your credit score negatively
Switching your outstanding balance again to another balance transfer card with low rate of interest may affect your credit rating negatively. So, be sure that you’d be able to repay the existing balance within the promotional period.
Lastly, you should make sure that you never miss your monthly repayments or exceed your credit limit. This will invalidate the entire deal and you’ll be charged standard rate of interest to repay your unpaid bills/cards. You should also know that the balance transfer fee is an inevitable factor in this process. There can be many hidden terms and conditions as well.
Hence, it is advisable that you should do a thorough research of your creditor before taking out a balance transfer card. Thus, it is advisable to compare the terms and conditions of different lenders and choose a suitable one that will help you reduce your credit card debt.