If you got into debt by using credit cards, it might be hard to believe that your ticket out of debt is simply moving that debt to another card. But a balance transfer to another credit card could help get you on the path to being debt free, if you do it the right way.
Reasons to do a Balance Transfer
There are at least a couple of reasons to do a balance transfer to try to lower or eliminate your debt.
- For one thing, the initial transfer may extend the period of time you have to make a credit card payment. For example, when you transfer a balance to a new card, you'll have a full payment cycle until you need to make a payment on that card. So if you make the transfer late in the payment cycle on your first card, you'll essentially get to skip a payment.
- Another advantage of a balance transfer is the ability to consolidate debt. If you have a high-enough credit limit, you may be able to transfer several balances onto one card, which can make it easier to manage your debt and avoid late payments and the penalty fees that come along with them.
- Of course, the biggest benefit of a balance transfer is a lower interest rate. There's really no reason to do a balance transfer if you're not getting a lower interest rate. If you have good credit, you may get balance transfer offers with low teaser rates, sometimes even as low as 0 percent for up to 12 months. If you take advantage of this, you can make a serious dent in your credit card debt.
Potential Pitfalls
If you want to get out of debt by using balance transfers, you have to be alert for pitfalls that could derail your savings.
- The first thing to consider is the fees. Almost all balance transfer offers come with fees. A typical fee is 3 percent of the balance. That may not be a big deal if you only owe a couple thousand dollars, but if you owe a large amount, it can eat into any savings you are realizing. For example, if you owe $15,000, you'll pay $450 in fees to transfer the balance. If you are transferring a large balance, look for credit cards that have a cap on fees.
- Another thing to watch out for is the interest rate terms. Many cards have different rates for balance transfers and purchases. If you get a card that has a low teaser rate on balance transfers, the same rate may not apply to purchases. That means if you intend to use the card for purchases, you could be hit with higher interest charges, because most cards will apply your payment to the debt with the lower interest rate first. If you intend to use the card purchases, try to find one that offers the same rate for balance transfers and purchases.
- Finally, pay attention to the regular interest rate on the card, not just the teaser rate. Assuming you are not going to be able to pay off the entire debt during the teaser rate period, it's important to know what rate you'll be paying in six months or a year. If you transfer debt from a card that has a 15 percent interest rate to one that offers 2.9 percent for six months but afterward has a rate of 20 percent, you could wind up paying more in the long run, which defeats the whole purpose of a balance transfer.
Andy writes about credit card balance transfers at FinanceChoices.co.uk. For more of his work, head on over to their blog about managing money or follow him on Twitter.
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