Debt is something that hardly anybody likes but unfortunately sometimes you just get into debt and the question is not whether you like it or not but how to get out of debt. Debt consolidation and refinance loans are always an option. Balance transfer is another way to get out of debt or at least to save some money.
When a Balance Transfer Is an Option
It is not necessary to be in debt in order to do a balance transfer. Balance transfers are just one neat trick that can help you save money, no matter if you are heavy in debt or not. But what is a balance transfer?
Although the term itself tells a lot, it is good to clarify it further. When you do a balance transfer, you transfer the amount of your unpaid credit card debt from one card to another – usually a no interest credit card or a low-interest credit card. Since the amount of your unpaid credit card debt is called an outstanding balance (or simply a balance) , hence the name balance transfer. Well, in accounting and finance there are many other types of balances, so maybe that is why the term is misleading but now, when you know what balance transfer is, you can safely start shopping for it.
How a Balance Transfer Works?
The economic logic behind balance transfers is that you move your debt from a high-interest credit card to a lower interest credit card. For instance, you have $5,000 credit card debt at an interest rate of 18% per annum. If you decide to pay back your current debt in a year’s time, you will have to pay $5,500.80. And this is if you don’t borrow more. If you borrow more, the amount you will have to pay soars even further.
Now let’s see what happens if you make a balance transfer. You transfer that $5,000 to a credit card with 6-months introductory period, during which you pay no interest, and 10% interest after that. Assuming you pay the same monthly installment (about $460 a month), in six months you will have reduced your debt to about $2,200. If you keep with the same monthly installment, you will need 4 months only to repay your debt. Or you will need 10 rather than 12 months to repay your debt when you make a balance transfer to a lower-interest-rate card or to a no interest credit card. But the most important thing is that you will have saved about $200-300 in interest rate payment as a result of this operation.
How to Choose a Balance Transfer Deal?
The savings are greater when you select a longer period of repayment or a longer grace period. But since generally longer periods of repayment are not recommended because you end paying more, no matter how low the interest rate is, keeping the period of repayment as short as possible is best. Longer grace periods are also a double-edged sword because generally credit card issuers do not love to offer long grace periods just for free. If you get a credit card offer with a long grace period (12, 18 months or more) this usually is accompanied by not so nice interest rates after that. But if you think you can manage to repay your debt in full before the grace period is over, you can try to get a credit card with a longer introductory period and higher rate after that.
Besides the length of the introductory period and the interest rate after that, two additional factors to consider when shopping for a balance transfer card are its credit limit and annual fee. Obviously, the credit limit should be higher than your current debt. But even if the credit limit is not very high, don’t reject the offer. Generally it is better if you have a higher credit limit but having a lower interest rate and a longer grace period is more important in your situation.
Annual fees tend to decrease, due to the competition among credit card issuers, but you still need to watch out for this. If your present credit card (the one with the unpaid balance) has a zero annual fee and you are considering a new credit card with $100 annual fee, than there is no need to calculate that the new card will eat up your savings.
One other important issue is charges. Sometimes credit card issuers charge for balance transfers. So, before you apply for a new balance transfer credit card, check for charges as well. If you spend the time to shop for the best balance transfer deal the saving could be substantial, so it is worth the time and effort.