In one way or another, almost everybody finds themselves with outstanding debt. While these amounts overdue like credit card debts and overdrawn accounts help you to navigate rough financial patches, if not handled correctly they may cost you a lot in interests, and in extreme cases, they may affect your credit score negatively.
That’s why when handling your debts, you should be very careful. one of the smartest moves that many people embrace in their debt management is through a balance transfer.
But, what is a Balance Transfer?
It is the process of moving an outstanding debt from an existing account to another—most probably a new one. The main goal for undertaking this process is to embrace the advantage of the lower interest rate offered elsewhere. More importantly, you may opt for a balance transfer to enjoy better benefits such as reward programs that can help you to earn points or get some cash back.
So, if Mr. Brad moved part or all of his outstanding credit card balance from the existing account to a new credit card account, then we can say he has conducted a credit card balance transfer.
How does Balance Transfer Work?
As a marketing strategy, most of the credit card companies may choose to offer you a zero percent or very low-interest rates in the promotional period of a balance transfer. Owing to the fact that most of the cards have an APR above 20%, this is quite an appealing deal.
Nevertheless, it is imperative to realize that the credit companies charge a fee of between 0 and 5 percent to complete a balance transfer process. After the introductory period is over, the credit card company in question re-introduces the normal interest rates on the card.
But, in the long run, you will have saved on the amount that was waivered during the introductory period.
What are the Factors to Consider when Making a Balance Transfer?
From what we’ve discussed above, the process of balance transfer gives you a great deal on interests when used right. If you didn’t know about this process, probably you are excited and can’t wait to try it out.
While the process of conducting a balance transfer is not rocket science, it’s not a walk in the park either. You have to examine the fine print carefully to understand the terms involved in the process before embedding your signature.
In this regard, let’s examine some of the factors to consider before going for a balance transfer:
- Interest Rate– Before making a balance transfer you have to do your research to determine if your new rate will help you save as compared to the existing rate and by how much.
- Fee– Always remember to include the transfer fee, annual fee, and other underlying fees when making your calculations. If these fees together with the new interest exceed the interest on the existing account, then the transfer is not viable.
- Balance Amount– Different card companies have different policies on transfer limits. If the amount of balance you wish to transfer exceeds the balance limit in question, then you will be prompted to make partial balance transfer. If so, always remember to keep current with payment on both cards.
- Promotional Period– This a probation period when the card company in question charges no or low-interest rates. It is always advisable to work with a card provider who gives you an ample promotional period that will allow you to have re-settled your debts before it expires. Remember, the interest shoots up to normal rates after this period elapses.
- Penalties– Understand the policies on the fine print concerning penalties before agreeing to a balance transfer. Try to understand the consequences of missing a payment. Learn if there are additional hidden payments included on your balance. Also, understand how the interests shoot up after promotional period elapses.
The whole point of making a balance transfer is to save on interest and to have better repayment terms. That’s why before jumping into the process, try to understand all the terms of the process and how much you stand to save.
For more information on balance transfers, contact us.