If you have credit card debt or some other form of debt that you are trying to pay off, balance transfer offers from credit card companies can be a very useful tool to help you save money on interest and also help you pay down debt faster.
What is a balance transfer?
Balance transfer is a process of taking some form of loan balance (credit card, personal loan, auto loan, etc.) and moving the balance to another credit card. The credit card company offering such an option will typically also offer an introductory rate of 0% APR for a limited duration (6 months to 1 year). The rate will go up after the introductory period.
Why would financial institution offer such a scheme?
The credit card companies making such an offer will review your credit history and determine if they can extend you credit. However, you may already be using another credit card. So in order to get you to become their customer, they offer an introductory rate.
Step by step plan to pay down debt using balance transfer offers
1. Apply for a card which offers O% interest rates on balance transfer. (Note: Some cards may offer you 0% APR on balance transfer but charge you a balance transfer fee of 3%. The fee is however lower than what you would end up paying as interest over the course of the year on many other cards.)
2. After getting the card, make sure you read the terms and condition of the balance transfer. Note the duration of the 0% APR offer, any transaction fees, the amount of credit limit.
3. Initiate the balance transfer process. (Some cards will only allow you to make one transfer, so transfer the money to a bank account and use that to pay down balances on your other credit cards).
4. Pay down your balance on credit card/s with the highest APR. (Even after a balance transfer, you may have balance on credit cards that are charging you a higher interest rate. Make minimum payments of all cards and loans; and pay down the one with highest interest rate first).
5. Don’t make any purchases on the card you signed up for balance transfer. Although your the balance you transferred is not subject to any interest for the introductory period, the purchases you put on the card are likely subject to interest. Some companies may apply any payments you make, first towards the amount you transferred under the balance transfer scheme and then apply any remaining amount towards the purchases. This will defeat the purpose of the 0% APR scheme which you had signed up for.
Things to be careful about
Late payments: If you miss a payment when you are making use of the promotional 0% APR scheme, you will be subject to a late fee, your promotional period will end and you will start paying a very HIGH APR as a penalty. So if you are using the 0% interest rate as a way to pay down debt, be careful not to miss any payment.
End of the promotional 0% APR period: When the promotional period ends your APR will jump (often higher than what you were paying on the card you transferred money from). Keep track of the date. Your goal is to pay down the balance before this date. If you are still carrying a significant balance, look for another 0% APR offer and
Don’t close the other cards that have zero balance now: An important factor for calculating credit score is the credit utilization ratio ( ratio of credit utilized and credit avaible) . If you close such cards, you may negatively impact your credit score.
Remember, Balance transfer is a tool that can be used to pay down debt. Don’t use it as a way to just delay paying debt or to pile on more debt.
Have you used 0% APR balance transfer offers before to pay down debt? Let me know your story.