Most people use credit cards to achieve everything that they can’t afford with cash. But this habit can get you into serious financial trouble. Exhausting credit card limits, when you go shopping, is pushing you towards the vicious cycle of credit card debt. The problem becomes intense when you see that your credit card bills are beyond your affordability and you won’t be able to repay them after meeting all your other financial obligations. Soon you will start getting creditors to call for the money, which is frustrating.
If you are one of those who are receiving frequent calls from the creditors, then look for a solid strategy that will help you repay your debts soon.
Read this article to learn how you can repay your credit card debts quickly.
Considering the balance transfer method can help you repay the debts soon
Remember, you can repay your credit card debts through various methods. But the balance transfer method has come to center stage.
The main advantage is that the introductory rate is low, or in some cases, non-existent (0% APR) for a certain period.
Consumers find this option handy as it allows them to transfer high-interest debt to a single credit card with a comparatively low-interest rate.
This allows them to pay off their debts relatively quickly and at the minimum interest rate.
What is the balance transfer method?
As per definition, we can say it’s a process of transferring high-interest debts to another card with a lower interest rate. This method will help you to pay off your credit card debt by making payments to the principal balance, rather than towards high-interest charges. The more you pay the principal, the sooner you can eliminate your credit card debt.
A balance transfer is a simple concept where you’ll be using one credit card to pay off another, but with the benefit of a lower interest rate.
How does a balance transfer method work?
If you want to follow the balance transfer method to repay your credit card debts, you have to take out a credit card with a low-interest rate. Make sure that the interest rate on the new card, you’re taking out, is lesser than that of your existing credit card.
Now, you have to transfer all your debts to your new card. You have to make only one monthly payment to repay your multiple debts. This way you’ll be capable of managing your multiple payments and become debt-free soon.
Balance transfer method – Its advantages
With the balance transfer method, you can club all your credit card accounts into a single account. Once you opt for this method, you will not have to pay separate bills every month. You have to make a single monthly payment to repay the outstanding balance on the balance transfer card.
Go through the other benefits of paying off debts with the help of the balance transfer method.
It’s an easy and simple method
Compared to other debt-relief options, the balance transfer method is relatively simple. To request a balance transfer, you will need to provide some information to the bank. The request will be processed automatically and your credit card will be generated.
It helps lower interest rates
With the balance transfer method, you can repay the outstanding balance at a relatively low-interest rate. Even a 0% annual percentage rate (APR) is offered by some credit card companies for a limited time period.
If you’re able to take out a balance transfer card with a low rate of interest, then it will help you to save money on interest. Thus, your maximum payments will be utilized to reduce your principal balance.
When you make your payments you’ll find a gradual decrease in your debt balance. This will motivate you to repay your debts and you’ll become debt-free faster.
Since you need to make single monthly payments, it will be easier for you to manage it without missing it. In turn, you’ll be able to avoid paying late penalties.
You can earn rewards
In case you successfully transfer your balances to a rewards credit card, you are entitled to earn points, cash rebates, or other rewards, based on the T&C on the card.
However, to earn the reward points, you usually have to transfer a hefty balance to the card.
It helps you to save money
Considering professional debt relief service is comparatively expensive. You have to pay a third party for consolidating or settling your debts. Considering the balance transfer method is relatively cost-effective, which will help you repay debts soon.
You just need to pay a one-time processing fee of 2% to 3 % depending on the card you select. However, make sure you make the monthly payments on your new card on time.
Balance transfer method – Its disadvantages
It is now clear to you that paying off credit card debts through the balance transfer method helps consumers who are drowning in debts. But there are some downsides too.
You might find this method enticing but you have to be aware of its negative effects.
The interest rate on your balance can increase rapidly
You’ll be able to repay your debts at a low-interest rate for a certain period. If you’re unable to repay your debts within the stipulated time, the interest rate on your card will increase.
In such a situation, you’ll feel helpless and won’t be able to repay your debts and you’ll seriously hurt your credit score.
The introductory offer can be canceled
If you are late with a single payment, the card-issuing company can cancel the introductory rate and may start charging a higher rate.
Lastly, before taking out a balance transfer card, check whether or not the lender is charging you higher fees for transferring your debts. Search for lenders who will charge you a reasonable balance transfer fee. It will help you save your hard-earned money and you can use it to repay your debts.
How to choose the best balance transfer card
There are a few things you should remember to avoid major mistakes while choosing the best balance transfer card.
Check the introductory period and interest rate
As per the law, the credit card promotional rate should last for at least 6 months. However, some credit card companies may offer you 18 months, or even 21 months. So, choose the card that will give you the longest introductory offer period.
In that introductory period, many balance transfer cards might offer a low or 0% rate for transferring balances. The low-interest-rate will help you pay off your credit card debts by eliminating monthly finance charges on that card. You must check out the interest rate before applying for a balance transfer card. Practically, a 0% to 2.99% interest rate will be the best choice.
Check out the balance transfer fee
Normally 3% to 5% of the balance is applicable as the balance transfer fee to most of the balance transfer cards. The bigger the amount you transfer, the higher your fee will be. Practically a balance transfer fee reduces your savings. So, if you are getting any card that offers you zero fee on balance transfer, don’t hesitate, just get it.
Check with your credit card provider
Choosing the right credit card provider is an important thing. You can’t transfer your credit card balances between two credit cards issued by the same company. Always pick balance transfer cards from separate companies.
Check the qualification criteria
Normally credit card companies offer a huge number of pre-approved cards to consumers who meet their basic criteria. But when you apply, the credit card company will definitely examine your income, credit history, and other financial factors. It might also happen that your application might get rejected. So, check out the qualification criteria and proceed accordingly.
Now, it is time for you to know the best way to transfer your credit card balance through a balance transfer card.
How to avoid balance transfer mistakes smartly
List the balances as per the priority
List all of your credit cards as per their interest rates and balances. As per your choice, choose one or more cards to transfer your credit card balances. The high-interest balance might be in your name or your spouse’s. If you have an excellent credit score, it will be easier to get a 0% offer. You can pay off your spouse’s old balance and start a debt-free life together.
Remember the promotion expiry date
The 0% rate is normally valid for 12 to 18 months. You must calculate whether or not you can afford to pay your balance in full within the introductory period. If it is not possible for you, then you should know what interest rate you have to pay at the end of the introductory period. Your credit card company will not send you a reminder that your promotional period is about to end. They would rather expect you to miss the deadline and start paying interest on your balance.
Remember the penalties
Don’t forget about the balance after the transfer. You still have to pay for it before the promotional period ends. Before the due date, you must make the minimum payments, it’ll help you to maintain the 0% rate.
If you miss one payment, the balance will start building interest. Similarly, if you make late payments, use your total credit limit and beyond or your check gets bounced, the interest rate will start jumping again as a penalty, typically as high as 29.99%.
Decide how much you want to transfer
Remember the new credit limit on your balance transfer card. You aren’t allowed to transfer a balance more than your available credit limit. Balance transfer fees are included within the credit limit. If you have a $20,000 credit limit on your new card, you won’t be able to transfer a $20,000 balance with a 3% balance transfer fee.
Calculate your balance transfer fees
Check out the balance transfer fee before you start the balance transfer process. Calculate how much you have to pay in total on the amount you want to transfer. The balance transfer fee might range between 3% to 5%. Ask yourself, how much can you save even with the new interest rate, if you still have to pay such huge transfer fee? It’ll be easier for you to calculate the fee through an online balance transfer calculator.
Fortunately, some cards have an amount cap on the balance transfer fee. If you have such a card in your wallet, that can be the best way to transfer your credit card balance, especially the large balances. For example, there’s a balance transfer fee of 4%, up to a maximum of $95. You transfer a balance of $6,000 but due to the cap, you don’t have to pay $240 (4% of $6,000) but only $95.
Upon checking both of your old and new accounts
You should ask your credit card provider about the transfer time frame if it’s not stated anywhere. Please allow a minimum of 2 to 3 days and up to 10 days to complete the transfer. Your new creditor might take that time to pay off your old creditor.
Check each old account after the balance transfer whose balance you’re paying off. In the meantime, don’t miss any payment due dates on those accounts to avoid late fees. Check your new account also to see when the balance has transferred over.
How do balance transfer credit cards affect your credit score?
Balance transfer credit cards give you big support for paying off credit cards. They give you the option to get credit card help without asking anyone for money. It saves you from the tedious task of buttering your friends for cash. However, that leaves one question unanswered, and that is,
How does it affect your credit score?
Depending on various factors, credit card balance transfers can either help to boost your credit score or hurt it.
Initially, your credit score may go down when you apply for several cards with low introductory interest rates. Now, the average age of your open credit accounts constitutes 15% of your credit score. The longer the age of your account, the better your FICO score.
When you open a new credit account, you lower the average age of your credit account. This hits your credit score and it drops by several points.
Whenever you apply for a credit card, it triggers a hard inquiry on your credit report. One inquiry has the potential to drop your credit score by 35 points. Now, you do the calculations. If you apply for 6 credit cards with 0% APR, then you might lower your FICO score by up to 210 points.
What’s the way to consolidate your credit cards without hurting your FICO score?
1. Apply for only one card:
Do extensive research and apply for one balance transfer credit card to minimize the negative effect on your FICO score. Make sure you apply for a credit card that gives you a higher credit limit than the amount you need to transfer. When you exhaust your entire credit limit, your credit utilization ratio becomes 100% and that drops your credit score.
The credit utilization ratio accounts for 30% of your credit score. When the total available credit is high and the money owed is low, your credit utilization ratio drops. This will have a positive impact on your credit score.
2. Keep the other accounts open:
Don’t close your old accounts because they will hurt your credit score. Keep your accounts with a long and good payment history open because they help to keep your average account age high.
3. Pay off credit card debt fast:
Balance transfer helps to boost your credit score only when you pay off credit card debt quickly. This means that if the teaser rate is applicable for only 18 months, then you should pay the total transferred amount within that period only. It helps to improve your payment history and credit score alongside.
Is balance transfer better than a debt consolidation loan?
See 3 credit card debt consolidation options. The first option is a credit card debt consolidation program. The second option is a credit card debt consolidation loan and the third option is the balance transfer credit card.
All 3 credit card consolidation options have different pros and cons. Usually, a credit card consolidation program is considered as the best option to consolidate credit card bills because the stake is not high. The risk factor is 0. But what about balance transfer credit cards and debt consolidation loans? Can we say the same thing regarding them? Let’s find out.
|Balance Transfer Credit Cards||Debt consolidation Loans|
Reason: You may have to pay a high-interest rate if you can’t pay off the balance within the introductory period.
Reason: You can lose collateral if the loans remain unpaid.
|Eligibility Criteria||Not too stringent
Reason: You only need to have a decent credit score.
Reason: You need to have a good credit score to qualify for a low-interest rate.
To secure loans, you need to pledge collateral.
|Late payment repercussions||One late payment for the entire deal. You may have to pay a high-interest rate.||One late payment is enough to put a negative mark on your credit report. You may have to pay late fees.|
|Fees||You have to pay a 3% fee on the total amount transferred.||You may have to pay an origination fee. The fee depends upon the type of loan you choose.|
Everything is there right in front of you. Both the options have some positive sides and some negative sides. Compare all the salient features and then decide which one is the best option to consolidate credit card bills.
Credit card balance transfer is a tool to help you get out of debt faster and save money on interest. It also helps to avoid hurting your credit report. If you understand the fine print terms and conditions, grabbing a 0% interest offer on a new card could be very easy.
However, you should consider transferring your credit card balances as a loan. Don’t make purchases using the card until you’ve paid off the balance transfer entirely. If you want to do both things together, find a credit card that’ll offer you a 0% introductory rate for the same number of months with a balance transfer and purchase benefits.