One of the common ways to manage multiple credit cards and pay off debt quickly is by doing a credit card balance transfer. Are you wondering, "how do balance transfers on credit cards work, and what is a balance transfer?"
Well, a balance transfer is when you move your balances from one or multiple credit cards to a single card that offers a much lower interest rate, usually for a fixed period of time. Typically, you'll find balance transfer offers advertised at a 0% introductory interest rate.
So how do balance transfers on credit cards work to help pay off debt? Well, a balance transfer can help to save money on interest while paying off your debt.
But it's also a huge trap people fall into! This is because credit card companies offer balance transfers and the associated incentives as a way to make money.
How do balance transfers on credit cards work with credit card companies?
Balances transfers seem like a credit card advantage, right? Well, it's a pretty well-known fact that most people do not pay off the balances they transfer before their introductory rate expires. That allows the credit card companies to charge more interest than normal based on the agreement you made with them.
This is because after the introductory period is over, the interest rate on your balances can be much higher than usual. These details are highlighted in the fine print that can be pretty easy to glaze over.
The psychology of credit card balance transfers
The biggest reason people don't pay off these balance transfer amounts? Because they get comfortable seeing the "new" lower interest rate, and they think they now have more time to pay.
In addition, many people end up increasing their balances through new spending because they think that now that they've reduced their interest, the debt will be much easier to pay off.
How to do a credit card balance transfer the right way
It's important to know the details of the card you are considering, along with knowing how to transfer your balance the right way. Check out how to do a transfer to benefit you best!
1. Create a payoff plan
In other words, you need to make sure you can afford to pay off your balance in full before the introductory period expires. Have you calculated how much you'd need to pay each month to pay off your balance in full by the expiration date?
If you run your calculations and find that you can't pay your balance off in full before the introductory period offers, it might actually cost you more money in the long term if you make that balance transfer.
Create a debt payoff plan to ensure you know exactly how much money you need and how long it will take you to pay off your balance.
2. Be aware of the balance transfer fees
Another question to consider is, "How do credit card balance transfers work as far as fees?" Many balance transfer agreements require you to pay a percentage of your balance as a processing fee. This can be anywhere from 2% – 10%.
So it's important to ask yourself whether the fee is worthwhile (will you still save money?). If you choose to do a balance transfer, look for a card with no fees for the transfer and has a 0% introductory period of at least 12 months (in which time you can work to pay off your balance).
3. Check your credit score before you apply
The most important thing to do before applying for a new card is to check your credit score. To qualify for a 0% APR, you will need to have an excellent credit score; otherwise, you may either get declined or offered a higher rate.
Checking your score first will save you from applying for no reason. Improving your credit score can help you qualify for loans with better interest rates, which can save you a lot of money!
4. Do not continue to charge purchases
Just because your new credit card has a 0% APR doesn't mean it's time to hit the mall. Charging up purchases only adds to your debt and can prevent you from paying off the balance before the introductory rate matures.
What is a balance transfer good for if you add more debt to your cards? Use this card for exactly what it's for—to save you money on interest and get out of debt for good!
Wondering, "should I do a balance transfer?"
If you're wondering, "Should I do a balance transfer," the answer is only if it benefits you financially. That's why it's essential to create a debt payoff plan and know the balance transfer fees' cost. O
ne other benefit of a balance transfer is simplifying your finances by bundling all of your payments into one.
Again, you only want to transfer your balance if you can pay it off before the rate increases. Otherwise, it's best to tackle your debt with another method.
Alternatives to a credit card balance transfer
If you've decided a balance transfer isn't financially beneficial, or you can't qualify for a 0% APR at this time, there are alternatives to a credit card balance transfer.
1. Consider focusing on paying off your balance in full where it is now
Remember, the credit card companies are not doing you any favors! Offering balance transfers is a strategy they use to make the maximum amount of money possible on interest. And for the most part, they always win. So don't get into this game without a plan of attack.
If you feel like doing a balance transfer will be more trouble than it's worth, don't do it. The short-term gratification of a 0% interest rate that will inevitably lead to you paying more interest over time is not worth it if you won't be paying off your balance in full before that 0% interest rate is gone.
The surest way to win is to buckle down and pay off your debt as aggressively and as quickly as possible.
Clever Girl Tip:
If you choose to do a balance transfer, don't run up new debt on your old credit card or on the new credit card. Remember, the whole point of doing the balance transfer is to save money on interest payments so you can pay your balance off faster. Also, be sure that you don't miss any payments or pay late, as this could void your 0% interest rate.
2. Ask for a lower rate
Depending on your credit and relationship with your cardholder, you may be able to get a lower rate. They may be offering a promotional rate as well. It never hurts to ask.
Call your card issuer and ask if you qualify for a reduced rate based on your credit history and relationship.
3. Apply for a personal loan instead
You may wonder, "should I do a balance transfer or get a personal loan?" Well, people opt for a personal loan to consolidate their credit card debt because they will have a fixed rate for the life of the loan rather than trying to pay it off before the promo rate matures.
This is a good option only if the rate is lower than the rate of your current card.
For instance, if your credit card rate is 23.99% and you qualify for a personal loan with a rate of 7.99%, then it would make sense to consolidate your debt. This could save you quite a bit of money in interest if you do it right.
Remember, you will still need good credit to qualify for an unsecured loan. And you still want to consider all the fees involved to make sure the new rate really makes sense for you.
Some people opt for a secured loan such as a Home Equity Loan to consolidate their debt. However, we advise that you try other avenues to prevent risking your home as collateral.
Be cautious with balance transfers
So, how do credit card balance transfers work best for your finances? When they can be paid off within the 0% interest rate promotion. However, be cautious with balance transfers, no matter how great they sound.
It's very easy to get sucked into a new card for rewards and cashback features but then rack up more debt because of the no-interest mentality.
The key is to make it work in your favor! That's why it is vital you figure out your debt payoff plan before applying for the card. You can pay off your debt with or without transferring your balance by changing your money habits and learning how to use credit cards wisely.