Balance Transfer Hacks: Everything You Need to Know

It’s fairly common for consumer debt to pile up to an alarming rate, especially when it involves high-interest rate credit cards. Over time, paying only the minimum payment creates a situation where it seems as though the debt may never be paid off in full. That’s a reality when you don’t take advantage of debt consolidation or other reduction strategies when the opportunity arises. A balance transfer can be a lifesaver for those in debt, but it is important to understand how it works and when it makes the most sense to pull the trigger.

What, Exactly, is a Balance Transfer?

Most consumers who currently have an active credit card or two get balance transfer offers in the mail or online every now and again, but they may be unaware of what a balance transfer can do for them. In the simplest terms, a balance transfer is the process of shifting one credit card balance to a new or established credit card. The balance transfer eliminates most if not all of the current credit card debt and starts new with a different card. The intent behind a balance transfer is to lower the cost of carrying a balance, as transfer offers typically come with promotional interest rates that are far lower than standard credit card rates.

Crunching the Numbers

Transferring a credit card balance may seem like a pointless task on the surface, but when you take a close look at the numbers, it can make strong financial sense. Let’s say you receive a balance transfer offer that comes with a 0% interest rate for the next 15 months. If your current credit card debt is on a card with a 19% interest rate, you could essentially be saving those interest charges calculated on the balance for the next 15 months. With this example, paying $100 per month on a $5,000 balance, it would take a little over eight years to pay off the card!

With a balance transfer, you can seriously expedite your debt paydown, based on the low to no interest rate. Your payments are applied toward the principal balance only, since there is no interest accumulation, meaning your debt balance can disappear quickly. Taking the same example above, and maximizing on the 15 month 0% interest offer, you could effectively pay off the $5,000 balance in that time frame with a monthly payment of $334.

What to Consider

While balance transfers seem like the end-all to credit card interest accumulation, there are things to consider. Most financial institutions offering balance transfers only do so to highly qualified consumers. That means your credit needs to be strong in terms of score, payment history, and credit utilization in order to be offered a balance transfer in the first place. Next, credit card issuers make no interest-related revenue from balance transfers, but that doesn’t mean there is no cost to taking this route. Balance transfers often come with one-time fees, either as a stated dollar amount of a percentage of the balance transferred. It is necessary for cardholders to understand what these fees are and how they are applied to the balance transfer card before committing to this strategy.

Finally, balance transfers are only beneficial to those who are dedicated to not adding to their credit card debt in the future. If you do not have a strong grip on your spending or know a major purchase coming up must go on a credit card and be repaid over time, a balance transfer won’t do you much good. You’ll simply be paying off the balance transfer amount plus the new debt you accrue. Before deciding that a balance transfer is the right debt consolidation move for you, consider these factors first.

Posted on January 22, 2018 by in Credit Cards

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