There is a lot of credit card advice floating around because so many consumers rely on credit cards. For some, the reliance is a positive thing. They pay their bills on time and in full each month to boost their credit scores. They also use credit cards to reap purchase benefits as part of a rewards program. Others are not so credit-savvy, relying on credit cards as an additional source of income, which typically has the direct opposite effect on a credit score.
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Overall, credit cards can be advantageous, provided they are used correctly. One feature of credit cards that has long-since been misused is the balance transfer.
What’s a Balance Transfer?
A balance transfer is an incentive offered by credit companies where a customer can transfer existing balances from other cards to a new credit card. This essentially consolidates outstanding debt on several credit cards, making it easier to pay off debts with higher interest rates. Credit card balance transfers do not come free. Most credit card companies will allow a balance transfer but charge a transfer fee and other fees for carrying over balances.
Additionally, the APR on a balance transfer is usually higher than traditional purchases. Many consumers do not realize it because they are usually given a promotional rate that lasts only for a limited time. After the promotional period expires, the APR goes way up.
How to Make a Transfer Work for You
As mentioned, balance transfers can be beneficial for those looking to consolidate debts, making them easier to eliminate. By eliminating debts, you can clean up your credit score and reduce your debt-to-income ratio, making it easier to secure financing and better insurance rates in the future. Making one work to your advantage is not hard at all if you follow a few simple guidelines.
Know Your Numbers
Before you apply for a balance transfer credit card, check out the interest rate of the new card. Make sure you are clear on the APR before and after the promotional period ends so there are no surprises. You also want to compare the transfer costs on different cards. In some cases, it may not be worth it if the fees are higher than you can afford to pay. Compare interest rates after the promotion ends to see if they are ultimately higher than what you are paying now.
Budget Out a Payment Plan
You also need to make sure you know the end date of the promotional APR. Remember you will need to include all relevant fees in addition to your total debt to get an accurate number. In correlation to the ending date of the lower interest rate, you need to formulate a plan that will coincide with paying off the total balance before the promotional APR expires. Otherwise you are just adding more debt onto your shoulders. If you cannot formulate a plan for paying off the full balance in the allotted time period, a balance transfer is not a viable option for you even if it promotional rate is 0%. If you don’t do that math, the chances are good you are not making a financially-savvy move.
Focus Cash on the Debts
Never do a balance transfer without a sincere commitment to eliminating your credit card debt. Consider this your one chance at paying less for reducing debt. If your plan for eliminating the balance in the promotional time frame, you need to dedicate all available cash to ensure that happens, even if it means finding a source of supplemental income to speed up the process. Once all credit card debts have been eliminated, learn from your past mistakes and only use a credit card when you can afford to pay it off in full. Never use a credit card as an extension of your income (i.e., living off credit) and never transfer balances as a way of avoiding your monthly payment obligations. When used wisely, a balance transfer can be a part of your plan to eliminate debts but only if you already have a plan and the cash to back it up.
Pinyo is the owner of Moolanomy Personal Finance Blog, which covers a wide range of personal finance and investing topics, with features that include reviews, comparison guides, and Q&A sections.