If you have a huge loan or a heavy debt on a credit card that you can't afford to pay off, you could consider a balance transfer facility. It is a facility where you get a new credit card with a low APR and then transfer your high credit balance to it from your old cards. Basically, you use a new card to pay off your debt on other cards, but you get the provision of paying a lower interest rate. You might find a few balance transfer cards which offer 0% introductory APR for a limited period.
You can transfer your outstanding balance from multiple credit cards to a balance transfer card, thus streamlining all your payments into a single payment which is much easier to manage. However, when would it be ideal to consider a balance transfer? How to do a balance transfer? What are to be considered before doing a balance transfer? Let's get a little deeper into it.
How Does It Work?
We, at mymoneykarma, strive to make your finances easier for you to understand. Mentioned below is a detailed step-by-step description of how the balance transfer facility works.
Search for the best and most suitable balance transfer facility. (Read on to find more information on this)
Apply for a balance transfer card - you could do it online, through phone or by visiting the card issuing company.
Provide the details such as the account number and the amount to be transferred.
Wait for the issuer to approve your request. The lender or card issuer will check your credit history and credit score before making a decision. There isn't any guarantee that your application will be approved; even if it does, the full amount might not be approved for transfer.
Understand the terms and conditions. A card issuer might not allow you to transfer debt between the products of their own company. However, you can move other types of debt (like a loan or a mortgage) to a balance transfer credit card.
Wait for three weeks and keep making payments on your old accounts till you get alerted by the new card issuer that the transfer procedure has been completed.
Once the balance transfer is successful, all your old cards will be wiped clean, and your entire debt will be transferred to your new card.
Try to pay off most of your balance within the introductory period when the APR is low. That's how you must utilize a balance transfer card to your advantage - save money on interest and pay off debt faster.
What about the old cards? Well, try not to close them - your credit score will drop. Keeping your old accounts active is healthy for your credit history. However, if there is a hefty annual fee that you can't afford, you better cancel it rather than inviting more debt.
Research thoroughly before selecting a card. Your principal objective is to save money, so put all your other preferences aside and focus on finding out the card that helps you save the most. Here are a few things that you must consider during selection:
The whole idea behind balance transfer card is to give you enough time to pay down your debt. Choose the card that gives you an introductory offer of 0% APR for a limited period. Most balance transfer cards offer this scheme. Then how do you choose? Select the card that provides this offer for the longest time so that you can settle the debt by then and save some money on interest.
The Balance Transfer Fee
Some balance transfer cards might charge you a transfer fee of around 3-5% of the transferred amount. This means that each time you transfer a loan to your new card, you end up paying a fee. You could avoid this by looking for a card that does not impose a transfer fee. Else, select the card that charges the minimum fee for transfers.
For example, you already have an APR of 12%. The balance transfer card offers an APR of 10%. Over and above that, you have to pay a balance transfer fee of 4%. That doesn't look profitable at all. You won't save anything; on the contrary, you will pay more than before!
The Annual Fee
You should look for a balance transfer card which has no annual fee. However, you will qualify for such cards only if you have a good or excellent credit score.
Apart from these, you must also consider the following:
The balance transfer should be profitable for you. The amount you save in interest should be higher than the balance transfer fee.
You should be able to pay off the entire balance that you are transferring during the 0% APR period.
A balance transfer card is a useful tool for reducing debt. Go for it only when you cannot afford to pay your existing debt. However, you need to be very punctual and regular with your payments after you have transferred your balance. Try your best to settle the debt within the introductory 0% APR offer. You must not misuse this facility. Do not move debt from one card to another - that vicious cycle of debt may engulf you and ruin your financial health forever. Pay off your debt. It might call for some sacrifices. Just do it!