Did you know that you can transfer debt from one credit card to the other to save money? That’s what a balance transfer credit card does for you.
What is a balance transfer credit card? If you’ve ever checked the interest rate on your credit cards and noticed that the interest rate on one is higher than the other, you can move your credit card balance from the high-interest card to the low-interest credit card.
You can break the term balance transfer credit card into two for easy understanding. The first part is the balance transfer which is essentially transferring the balances of your existing credit cards or short-term loans to one consolidated account. The second part is the credit card which as you already know, is a card issued by a financial company that enables you to borrow money for a short term. Credit cards usually come with a maximum amount of how much you can borrow.
If you are still asking what is a balance transfer credit card? You’ve got the answer right here.
A balance transfer credit card allows you to transfer the balances from different credit card accounts and short-term loans to one consolidated credit card account. However, you can only transfer a maximum of the card limit.
For most people, a balance transfer credit card is like a magic wand that takes away the troubles of dealing with several creditors along with their unending calls and reminders to pay up. It’s an excellent way to convert those multiple creditors into a manageable and an easier way to manage debt.
Let’s look at the Benefits of a Balance Transfer Credit Card
1. You Get a Chance to Reduce Your Credit Card Balance Faster
One of the best things about a balance transfer card is that you can take advantage of a lower credit card interest rate. This is really a plus if you are stuck with a high-interest rate credit card balance.
A move to a lower interest rate card will give you an opportunity to shave off a considerable amount off your credit card balance without having to significantly adjust your monthly budget allocation.
2. You Can Get a Card with Better Terms
Just like the interest rate move, you can take a balance transfer credit card move to move from a credit card with bad terms such as high fees or short grace period to a credit card with better terms.
Sometimes your current credit card company could be giving you really sloppy service and you just want to move. A balance transfer card gives you the opportunity to make that move and get a couple of benefits along with the move.
3. An Opportunity to Consolidate Your Debt
Another plus for balance transfer credit card is debt consolidation. If you’re struggling to keep up with the payment dates of your credit cards or the interest rates or other terms and conditions. Probably you’ve been hit by a couple of penalties in the last few months. A balance transfer credit card, in this case, is a life saver. You can consolidate your credit card debt and other short-term loans and eliminate the hassle of keeping track of all these payments.
This last point is where the nice stuff about balance transfer credit cards stops. In other words, balance credit cards offer you convenience. After all, it’s easier to manage payments from one card as compared to multiple cards.
But that’s not all there is to balance transfer credit cards.
There are Many Pitfalls of a Balance Transfer Credit Card.
The shocking truth is that no one will ever tell you these hard truths. At least not the balance transfer credit card companies.
So here’s what nobody will tell you about balance transfer credit cards.
1. First, you’ll Need to Have an Excellent Credit Rating to Make the Move
Most credit card companies that offer a balance transfer card often require that you have nothing short of an excellent credit rating.
You’ll probably think, that sounds obvious. But if you are having trouble tracking your multiple credit cards, making on-time payments or keeping up with high-interest rates, it’s likely that you’ve taken a few hits on your credit rating.
The irony is that if you have an excellent credit rating, it’s likely that you’ll not have the “problems” a balance transfer credit card offers to solve.
You can know your credit rating by checking FreeeScore360. If you need some help getting your credit rating to excellent status, Credit Firm can help you add the points you need to qualify for the balance transfer credit card.
2. Second, you’ll Pay a Transfer Fee
Not only will you require an excellent credit rating, but you’ll have to pay to make the move. Most companies will charge a fee of about 3% of the transferrable balance but not less than $ 10. You can do the math and see how much you’ll part with for the move.
You pay another credit card company to get your excellent business. How absurd can that be?
3. The Lower Interest Rate is Just a Promotional Rate
Call it to bait or whatever, but, don’t be fooled by the illusion of lower interest rates. The bottom line is that the credit card company wants some of your cash and they make it by charging a considerable interest rate.
For starters, the lower interest rate only lasts for a short time, at most six months. So you’ll need to transfer the balances from all your cards (which usually take about six to eight weeks) and clear the entire credit card balance within the remaining period.
Moreover, not everyone qualifies for the promotional rate! Remember, you’ll need to have an excellent credit rating to qualify for it. Otherwise, you can make the transfer, but at a higher interest rate.
4. You Could End Up Paying More
Not only could you be disqualified from the “lower interest rate” so you end up paying a more, but you are also likely to lump some more payments in annual fees and transfer fees.
Have you checked how much you’ll be paying in transfer fees? (Remember the 3% of the credit balance) Add the annual fees, and include the high-interest rate. If you compare your previous payments to the new payments, you could be paying more!
Worse still, if you’re unable to clear the entire balance from your earlier credit card, you’ll still have a balance with the old card. You’ll be stuck with payments for the new balance transfer credit card and the old credit card.
That feels like going back to ground zero. You can use the Personal Capital app to keep track of payments and you’ll know how much you are parting with each month in payments for your credit card fees and interests.
5. They Just Want You to Make the Move
Here’s the hard truth, for most balance transfer credit cards, the promotional rate does not apply to new purchases.
When you buy new stuff using your new balance transfer credit card, guess how much interest rate will apply? Yes, it’s not the promo rate. And you’ll end up with two balances on your balance transfer credit card. The balance on the promo rate and the new purchases balance with the ordinary rate which is often higher.
But that’s not all.
By law, the credit card company is required to apply any amounts you pay that are above your minimum payment to the higher interest balance. However, they have the right to credit your minimum payment to whichever account they choose.
You can guess what that choice will be. Obviously, that’s the lower interest rate balance.
In other words, if you make new purchases using your balance transfer credit card and only make minimum payments, it’s only your low-interest rate balance. Charges on the new purchases will keep piling.
6. You Could Hurt Your Credit Score
The excellent credit score that you so desire to make the balance transfer credit card move could be in jeopardy.
First, making the application will trigger a credit report inquiry by the card company, a hard hit. Secondly, your card balance could exceed 30% of your credit limit. Your credit score takes another hit. Third, your card balance could still be lower than your limit but on the verge of hitting that limit, thus you don’t have enough available credit. Your score takes another hit.
If you’re not diligent in making on-time payments and reduce your balance, your credit score could sink. If you’re already there, don’t let a bad credit score put you down. Get in touch with Bad Credit Survival Guide; you’ll be back on your feet in no time.
7. Finally, You Could Sink into More Debt
After making the transfer to the new balance transfer credit card, you’ll have more credit available to you, especially if you’ve not closed the old accounts.
Suddenly, you’ll have access to a lot more credit than you had before. If you don’t have the discipline to control this “new found credit abundance” you’re bound to sink into more debt
Making the Decision
If you were wondering what is a balance transfer credit card? Now you know. These points will guide you as you look at the fine print. Ensure you know the rules and work it out such that the new balance transfer credit card won’t burn you down. You can check out various credit card offers on Credit Land and compare what’s on offer.
If it’ll help you make savings, cut costs and give you peace of mind, go for it. But if these hard truths apply to you, think twice about it.