Finance Globe

U.S. financial and economic topics from several finance writers.
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Will a Balance Transfer Work for You?

Are you juggling payments on high-interest credit cards and wondering how to finally get ahead of your debts? A popular offer with both card holders and card issuers is a balance transfer to a 0% introductory rate credit card.

These offers are typically for new applicants with excellent credit history and usually last anywhere from six to 18 months. When the introductory period is up, the remaining balance will begin to accrue the normal purchase interest rate disclosed in the credit card terms and conditions.

The balance transfer can benefit either the borrower or the creditor, depending on how the cardholder handles their transferred debt.

Card holders like the low introductory rate offers because it gives them a break from their usual interest fees. This gives them a chance to pay the balance off more quickly when more of their payment is going towards the balance rather than towards interest charges.

Card issuers also like these offers because it brings them new customers with a ready-made balance. Card issuers score big if the card holder doesn’t pay off the balance before the introductory period ends. Even better for the card issuer, by the time the introductory period ends the card holder may have run up the balance even more than what they started with when they transferred the balance.

And even though the balance transfer with a low introductory rate is simply a ploy by card issuers to gain new customers and increase profits, a smart consumer can come out ahead if they do it right by paying off the entire balance before the introductory period is up.

Now keep in mind that even with a 0% introductory offer your balance transfer isn’t truly free; most card issuers charge a balance transfer fee of about 3-4%, charged immediately upon the transfer.

So if you don’t make much of a dent in your balance before the introductory period ends and the interest rate changes to something similar to what you were paying before, you can come out not much better or even worse than before the balance transfer.

And avoid falling into the worst trap of all - ending up with more debt than you started with. Too often undisciplined card holders spend more than they should with temporarily free financing and put off paying down the balance. Or they allow themselves to be tempted by a zero-balance on the card they just transferred from, and run up new debt on the card they were trying to get paid off to begin with.

Read all the fine print and be sure you understand the terms and conditions, including the details of the introductory period as well as what interest rate you can expect when it ends.

For consumers without excellent credit, 0% introductory offers may not even be an option. But you may still be able to transfer a balance to a card with a lower rate and save on interest charges.

The first step is to take a look at your credit card statements to find the annual percentage rate (APR) you are currently paying. Remember, you’ll need to beat your current interest rate by enough to offset any balance transfer fees charged by the card issuer.

And the amount you’ll actually save will depend on the size of your balance and how long you take to pay off the balance. The longer you take to pay off your balance - for example, you only pay the minimum payment or not much more - the more important a few percentage points becomes, especially on a hefty balance.

Check out the offers available to you and consider applying for a new credit card if you can save enough on interest to make the transfer worthwhile.

Another option may be to transfer a balance to an existing account if you have a credit card that has a significantly lower APR than the others. At least one card issuer charges their current customers no balance transfer fee if you transfer balances from other cards.

But using my situation as an example, my APR with that issuer is slightly higher than my other cards - so it wouldn’t make sense for me. Your situation and mix of existing credit card accounts may offer better than mine does.

Finally, you may find that you just don’t qualify for the low-interest balance transfer that can save you money. It doesn’t hurt to call your card issuers to ask for a lower interest rate. Even if they don’t lower it, they may be able to tell you how your spending and payment habits contribute to the interest rate you have and what you need to do to get it lower in the future.

If you find you’re just stuck with your credit card balances at the rate you currently have, work hard to pay it off as quickly as possible. Always pay as much as you can to your credit cards, starting with the higher APR debts first.

The minimum payment should never be a factor in what you pay towards your balance unless you’re having a particularly hard time financially, such as with loss of income, large medical bills or other significant and unexpected bills. The minimum payment can help you get through those tough times when necessary, but habitually paying the minimum payment will keep you in tough times.

There are a number of systems to reduce your credit card interest fees and pay down your debts. Some ways are easier than others but they all center around paying off your credit card balances and living within your means.
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Saturday, 24 August 2019

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