Do you own a number of credit cards?
The average American household owes $6,006 in credit card debt. Depending on who you ask, these figures may appear to be high or low. Credit card interest, on the other hand, might quickly become burdensome if you’re having difficulties making payments.
Credit card debt is frequently seen as a terrible debt because it depletes your assets over time. Although, when used in conjunction with a balance transfer, this type of credit card can be a useful tool for lowering your monthly payments. We’ll look at what a balance transfer is, how it works, and the fine print you should always consider in this post. This may assist you in comparing options and making an informed selection.
How Does a Balance Transfer Work?
Let’s start from the beginning and define what a balance transfer is.
When you transfer a balance from one debt to another, it’s known as a balance transfer. Let’s imagine you have a Mastercard, an American Express card, and a Visa card from three different banks. Your Mastercard is delinquent by $2,000, your American Express is delinquent by $3,500, and your Visa credit card is delinquent by $3,000.
You owe a total of $9,500, according to a simple calculation. However, this isn’t the whole tale.
This is because each credit card has its own interest rate (also known as an annual percentage rate, or APR), which can range from 12% to 24%.
We’ll assume the following assumptions for the sake of this demonstration:
- You’ll pay a minimum of $100 per month on each credit card and stop using them altogether.
- Your Mastercard has a 15% annual percentage rate (APR).
- Your American Express card has a 19 percent annual percentage rate (APR).
- Your Visa credit card has a 12-percent APR.
- There are no annual fees on any of your credit cards, and the minimum repayment is only 2%.
Using a credit card payback calculator, you’ll be debt-free in three years (36 payments of $300). That is, paying a total of $10,668 where
The process of merging these loans into a single repayment plan is known as a balance transfer. Instead of paying three different interest rates, a balance transfer will combine them into a single annual percentage rate that is lower than the interest rates on your existing Visa, American Express, and Mastercard credit cards.
The purpose of a balance transfer is to save as much money as possible on interest payments. That means, instead of paying $1,168 in interest, you may save a lot of money if you use a balance transfer credit card and make the monthly payments within the promotional time.
What Is a Balance Transfer Credit Card and What Are the Benefits of Using One?
A balance transfer credit card is one that allows you to move money from one credit card to another (typically up to 80% of the credit limit of the card).
A balance transfer primarily offers two advantages in terms of benefits:
- Reduce the amount of interest you have to pay.
- Assist you in raising your credit score.
Paying interest does not increase your net worth. It has the opposite effect, which is why credit card debt is considered a bad debt. The purpose of a balance transfer is to allow you to repay the principal while lowering the amount of interest you pay.
The Following Steps
- Examine all of your credit cards and add up the balances outstanding.
- Make a monthly budget and compare it to your income to get an accurate picture of your spending patterns. This allows you to be realistic about how much you can afford to return in a short period of time.
- See what’s available by searching for “balance transfer offers” or “low APR credit cards.”
- To get personalised advice, speak with a professional financial counsellor.
- Make an application for a balance transfer.
- Cancel your existing credit cards once you’ve been accepted.
- Most importantly, keep to the payment schedule and never skip a payment, as well as avoid using the debt transfer credit card for any purchases.
Pay Attention To The Details
Read the fine print and seek professional counsel as you would with any financial product. When it comes to balance transfers, if you don’t pay off the transferred debt within the specified time frame, you may wind up paying more. And that’s the polar opposite of what you’re attempting. Similarly, if you use the balance transfer credit card to make purchases, you’ll have to pay them off first, and the APR on many cards can surpass 20% p.a.
Finally, here are some points to keep in mind when looking for a debt transfer credit card:
- What is the APR for the first time?
- What is the duration of the introductory APR?
- What is the maximum amount for a balance transfer? Typically, you can only transfer up to 80% of the credit limit on your card.
- What is the cost of transferring a balance? A fee of 1-3 percent is usually charged.
- Is there a yearly fee?
- What’s the minimum repayment due each month?
- Are there any balance transfer conditions that apply to your current credit card debts?
Important Points to Remember
- Credit card debt is computed on a daily basis, and even though the APR appears to be low, it can quickly pile up.
- When you transfer a balance from one debt to another, it’s known as a balance transfer. By taking on a lower APR, you can lessen the amount of interest you pay.
- Some debt transfer credit cards have a 0% APR, however they usually come with a one-time transfer charge.
- After you’ve completed a debt transfer, don’t use your credit cards again–you can keep them open even if you don’t intend to use them.
- Your credit score will improve if you pay off your credit card debt fast and consistently.
- ExtraCredit can help you build your credit profile.