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Balance Transfer Method: Look before you leap to stay solvent

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By: Phil Bradford
on 26th May,2016

However, to maximize benefits from them, you must have your basics strong.
Balance Transfer Method: Look before you leap to stay solvent


Balance transfer cards have the capability to bail you out of your ever-growing outstanding credit card bills. However, to maximize benefits from them, you must have your basics strong.

What is the process?

You may have to get a new credit card to repay the old. By transferring the balance from a high-interest credit card to one with a lower rate, you are, basically, paying back credit card "using the new credit card." For instance, if you are paying 13 per cent interest for a debt amount of $2,000, then you'll have to pay $347 for six consecutive months. But, if you transfer the same debt amount to a 0% annual percentage rate (APR) card, then your monthly repayment amount will be $334, thereby saving a neat $77 in interest out of the process.

According to Mike Sullivan, the director of education for the Phoenix-based nonprofit consumer credit counseling company, Take Charge America, the real and most definable advantage of a balance transfer card is that you save money in the long run, provided you repay all the outstanding balances owed in time at lower rate of interest and this includes all the expenses incurred.

Why this is offered?

Basically, credit card companies dole out these 0% APR or balance transfer cards out of their own business interest. Through these offers they want to attract fresh customers with good credit for the next 2-4 years and keep the existing ones hooked onto their cards, so as to ensure a steady stream of business trickling into their coffers. This helps them to beat the increasingly-robust competitors.

They do such business by offering credit cards at 0% interest rate (also known as teaser rates) for a definite, promotional period to get the outstanding credit card balances transferred of their customers and reduced rate of interests for the remaining period with respect to the balances transferred.

Still, due to reckless spending behavior, most of their customers do not or fail to make timely debt repayments, particularly prior to the expiry of the promotional period. Hence, the creditors stand to make money from the interest paid by the customers. Moreover, once the teaser rate period or the grace period is over, they levy different charges on new purchases made using the card.

Good credit is required

Before the economy went into a tailspin, 0% APR cards were widely available. But, as soon as the economy nosedived, these cards became rarer and more difficult to avail. However, these cards are making a comeback. But, this time, in order to get hold of one, you must have good or excellent credit, or else it'd remain a distant dream for you.

Precaution - Repeat transfer

If you payback the outstanding balances before the teaser rate expires just to avoid paying any interest on them, then moves like these might damage your creditworthiness. This is because excessive number of 0% APR cards will flag you as a risky borrower. As a result, accessing fresh credit would become a nightmare and loans will become hard to come-by.

Pros

First advantage of using a balance transfer card is to have your interest rate slashed, in case your creditor has decided to hike rate of interest on your existing credit card. This will reduce your debt burden and enable you to payoff your balances faster.

Second, you can choose for better loan terms on your new balance transfer card. For example, you can do away with predatory loan terms like high charges, poor grace period, etc and get something much more convenient and helpful.

Third, you can consolidate your high interest credit card balances into a lower one and thus, would have to make one single monthly debt payment.

Cons

First, if you don't qualify for the teaser rates, then you could end up with high interest rate. Many credit cards come with high interest rate for balance transfers than what they charge for purchases.

Second, you must have excellent credit score to obtain a low or zero interest rate balance transfer card. If you don't, then you'll only qualify for higher interest rate balance transfer card.

Third, the process could get expensive considering charges like balance transfer fee, annual fee, etc on the new balance transfer card. Mostly a balance transfer fee of nothing but a percentage of the balance transferred. Add to this annual fee and this will increase the costs of balance transfer by few notches more.

Conclusion

The matter can get complicated here. This is because you'll have no say over how your payments should be used, if you have 0% APR and new purchase balance at higher interest rate, both on the same card. As per the Credit CARD Act of 2009, issuers will have to apply any excess amount beside the minimum payment towards the debt with highest rate of interest first.

In order to avoid dual-interest-rate balance, you should avoid using balance transfer card to make any fresh purchases, as many issuers apply total minimum amount payment to the lowest interest rate debt first. This draws out debt repayment time along with the interest charges on the higher interest debt.

Besides, balance transfer method, there are some other ways to repay credit card debt.

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