The prospect of a 0 percent interest balance transfer might sound tempting, offering a few months without having to pay interest on your credit card debts. But before you lunge at the opportunity, take a moment to consider what it entails. It may seem like a no-brainer if you’re juggling multiple high-interest credit card debts with steep finance charges, but the process of transferring your balances may not be as straightforward as it initially seems.
What is a Credit Card Balance Transfer?
Many credit card companies allow consumers with one or more credit card debts to transfer their outstanding balances to a single card or account. Instead of paying off each account separately, you will make payments on the single card. However, you can only transfer an amount up to your credit limit on your new card. For example, if your credit limit is $5,000 on your new card and you want to transfer a balance of $5,500, you will only be able to transfer the first $5,000 – an amount that will also include any balance transfer fees.
If you’re interested in transferring one or more credit card balances, shop around for the best options, interest rates, fees, and terms. Once you’re approved for a card, you will be assigned your new credit limit.
Balance Transfer Pros
Lowering Interest Rates
Transferring your credit card balances may lower your monthly interest payments. If you are currently paying down an account with a high interest rate, a balance transfer will enable you to move that debt to a credit card with a lower interest rate, positioning you to pay down your debt more quickly. This is because most of your payment will be applied to the debt principal rather than accruing interest.
Securing Favorable Terms
If your current card or cards carry bad terms like high fees or a short grace period for missed payments, you can consider moving your balance to a different card with more favorable terms. Your new card may even offer credit points or rewards on any subsequent purchases you make.
Consolidating Your Debt
If you have more than one delinquent credit account, you can transfer all of your balances to a single card. This can reduce or eliminate the stress and struggle of managing multiple account payments per month. In short, it’s easier to pay down one debt than several!
Balance Transfer Cons
Stumbling into Higher Interest Rates
Although a credit card balance transfer can potentially lower your interest rates, unwitting borrowers may find themselves in the opposite situation: If you don’t qualify for a promotional rate (like a 0 percent interest rate), you may wind up with an equally high rate. Typically, borrowers need to have excellent credit scores to be offered a low interest balance transfer offer. Pre-existing credit card debt often makes this challenging.
Incurring Additional Expenses
You will have to pay a fee to transfer your balances, and in some cases, your new credit account will also charge you annually. Fee amounts depend on the vendors. Before you transfer your balances, shop around to find the lowest fees and the best terms, otherwise, you may end up spending more money in the long term.
Accruing Additional Debt
Once you transfer your balances, you will have more credit available to you. As such, it may be tempting to rack up new charges. If you pursue this course, it’s vital to develop the discipline needed to not only pay off your existing debt but to stay away from accruing new debt that will land you in an even more challenging situation. If you’re concerned that you’ll be tempted, close out your old cards, and challenge yourself to only use your new card to pay off your existing debts – not to make any new purchases.
Making Your Decision
The key with balance transfers, as with any other debt relief option, is to carefully consider how transferring your balances will affect your finances in the long term. Consider whether you will ultimately save money or spend more, how long it will take to pay down your debts, and whether there are viable alternatives that work for you. If you ultimately decide the pros of a balance transfer outweigh the cons, then it may be worthwhile.
Countrywide Debt Relief is a Better Business Bureau A+ rated company with a collective thirty years of experience helping debtors manage their bad debts. If you have questions about balance transfers or would like to learn more about how they can help you get out of debt, contact us for a consultation.