How Balance Transfers Work

When you do a balance transfer of your credit card debt, it involves taking the current balance that you owe one credit card company, and transferring it over to a new card. The most obvious advantage of taking a balance transfer is to save money by transferring a balance that is accruing higher interest to a card that is offering a lower interest rate, or APR. For instance, if your existing credit card has an interest rate of 12.99%, and you receive an offer to do a credit card balance transfer to a card that has an APR of just 3.99% or even a zero percent interest card, then you would definitely save on the interest that is tacked onto your account balance each month. You can transfer balances from more than one account onto a new credit card, and many of them will also let you transfer balances from department store cards as well. So, in a nutshell, that’s how you can save a significant amount of cash.

Other Advantages of Transferring Your Balances

Besides the potential savings that you can realize from doing a credit card balance transfer, you can also benefit from having all of your credit card debt transferred over to one card. This allows you to get a better picture of your overall debt and streamlines the monthly payment process because you would only be paying one lender each month.

Finding the Right Balance Transfer Offer

Wading through the sea of available credit card balance transfer offers can be a daunting experience because there are so many banks out there looking to lure consumers in. Many credit card balance transfer offers may look good at first glance, but the fine print may tell an altogether different story. Make sure that you read all the details about what you are being offered before you accept the card. You should look for a card that offers you the following benefits when you do a balance transfer:

• Low (optimally zero percent) APR. Make sure that the introductory rate that you are offered is valid for an extended period of time – at least a year. After that, know what the APR will revert to and make sure it is a rate that is more competitive than your existing card.
• No annual fee. You don’t want to negate the savings of doing a balance transfer by paying an annual fee. Many cards have no annual fee, while some may charge $250 or more right off the bat when you take out a card.
• Minimal or no fees for transferring the balance over to the new account.

Be sure to review more than one balance transfer offer before committing to a particular card. Stiff competition between credit card issuers means that even though one deal seems “sweet”, you may click around on the Web and find an even sweeter deal with another company.

Terms of the Offer

As appealing as a 0% APR balance transfer offer may seem on the surface, wise consumers will do a bit of investigating before signing on the dotted line and accepting the offer. Some offers may feature a zero percent APR for a very limited (usually around six months or so) period of time, while some may give you this great (free) rate for longer. For consumers looking to pay debt off fast, such as within the amount of time that the balance will be billed at zero percent, these offers are ideal. If you plan to take your time paying off the balance, then make certain that the APR that you will be charged after the initial “welcome” period is not higher than what you are already paying. You must also look at how much it will cost to transfer your balance from your existing credit cards to a new card when determining if a 0% APR balance transfer offer is for you. Most credit card companies will charge some type of fee for transferring the balance to your new card. Take this additional cost into consideration when making your decision. Also look at these possible pitfalls for the offer you are reviewing:

• Many people transfer a balance on a 0% APR credit card and then continue to make new purchases on either the old card or on the new card. This can lead to a never ending cycle of debt. If you transfer the balance over, don’t make any new card purchases until you have paid off the balance in full.

• Check to see if the introductory APR on the 0% balance transfer offer reverts over to a higher rate. Many card companies will revert the account over to what is known as the “cash advance rate” after so long if the balance that was transferred is not paid off within a particular timeframe. This is the same elevated rate that you are charged when you do a cash advance – and can be quite expensive.

• Find out before taking advantage of the offer if you are required to pay an annual fee. A high annual fee can make transferring your balance over less of a good idea if your savings go down the drain with it.

Option #1: Home Equity Line of Credit (HELOC)

A HELOC, or Home Equity Line of Credit, is a loan secured through the equity in a borrower’s house.  The loan differs from other types of loans in that the entire amount is not extended up front, but rather over a period of time that the borrower must repay.  This type of loan was very common in the last decade not only because the home was often the most valuable asset and the interest on the loan was considered tax deductible.  If you can get a HELOC this may be the easiest way to consolidate loans.  However, because many banks and lending companies have frozen HELOCs, this option may not be available.  Still it is a good idea to check it out with your mortgage or local bank.

Option #2:  Personal Loan

A second option is to take out a personal loan directly with a local bank.   Certain legislation is being introduced to increase the amount of money available for loans at small banks.  Of course, getting this option is dependent upon getting a better interest rate than what you have on your credit cards.  It does no good, for example, if you move your 10% credit card loans to a 15% bank loan.

Option #3: Transfer the Balance to New Credit Card

When you are trying to tackle your credit card debt, taking out another credit card seems counter-intuitive.  But many credit cards offer an introductory period where balance transfers are 0 percent for the first few months or a fixed rate for the life of the balance.  If you go with this option, though, a word of advice: read all the terms beforehand and make sure you understand exactly what the terms are.  A lot of companies will raise the interest rate for even a single late payment of 24 hours.

Often times, credit card debt gets out of control, becoming difficult to manage. One thing is certain: those who get into it end up paying the consequences for their actions. Improper credit card debt management leads to a slew of minor and major problems in every step that you may take in the future, whether it is buying a car with a loan or getting a loan approved to buy a home. You can prevent yourself from getting into this slump by managing your finances. But if you’ve already gotten into debt, there are a few ways in which you can get out of it.

First and foremost, once you have realized that your credit card bill has gone too high, STOP SPENDING! Don’t buy anything and everything just for the sake of buying. If you genuinely need something, buy it using cash, not the credit card. Start by filing all your credit card bills, analyzing them, checking all the different accounts, and making note of the minimum payments due on each. Once you have gathered all the amounts, take a look at all your incoming funds and calculate how much and how frequently you can manage to make you credit card debt payments after removing all your usual expenses (keeping them as minimal as possible and sticking to them).

Another great tactic to make paying off your debt easier is to look for 0% credit card balance transfer offers. If your credit rating isn’t too damaged you may be able to quality for new credit with a very low (or even zero) interest rate, allowing more of what you pay each month to be taken off your principal balance. When you have a high interest rate and you only pay the minimum each month your payments are barely scratching the surface of your debt.

See to it that you make the payments regularly, giving more priority to your personal loans (including credit card loans), and maintain a good credit history from here on out. This will make it easier to get loans approved in future when it is really important. When all is said and done, you must always be cautious when using your credit card. Think thrice before every purchase you make and always remember one thing – the more you delay your credit card debt payments, the more you end up paying!

APRs can come in different amounts that are usually based on your annual income, as well as your credit rating. If you make a lot of money every year then you will probably receive a very low APR, but if you are making a nominal amount of money annually then your APR will most likely be higher due to possible risks. These risks are associated with the fact that most banks, credit card companies and private financial firms feel that if you do not make a lot of money annually, they will have a hard time receiving their monthly payments. This is why they give you a high APR; so they do not have the risk of a large loss at the end of their company’s fiscal year.

This is why many people who fall into the range of middle class and below have found themselves facing a problem with their debt to income ratio, which could possibly ruin their credit rating if they do not handle the situation with care. For this reason, you should discuss your annual income with an expert in the credit field such as a financial adviser or even a bank officer. You need to make sure that you can actually afford the APR being offered to you and still be able to manage your monthly budget accordingly. You will also want to make sure that you don’t overspend and make large purchases that you cannot afford to pay back within a timely manner.

When the economy is not in the best condition a lot of banks, credit card companies and financial firms lower their required APRs; but do not be fooled, they will still make their money one way or another. So shop with an open mind and make sure to compare. Check with different companies and see which one can offer you the lowest APR and which companies offer better prices. If you are being forced into a high APR, then don’t deal with them, just leave. If you know about some companies which have the time to educate you on the APR and what it will mean for your financial future, though, you could always try them.

When it seems like you are being handed free money through credit cards and private loans it can be a challenge to maintain your composure, so just be careful and educate yourself. You can find out about APRs and what they represent online, through a local library and of course through your financial institutions. But make sure that you understand what is being explained to you; then you will find that APRs are just a component of the financial world and can be harmless if utilized properly.

Credit card companies make a good chunk of their money by all of the miscellaneous fees they hit their unknowing cardholders with. We say unknowing because usually the terms that determine how much and when you will be charged are hidden in fine print that most people skip over or do not thoroughly examine. If you’re searching for balance transfer offers you most likely have a credit card that carries a balance each month and the interest rate (and therefore finance charge) is too high for your liking. Some people are in the unfortunate position of wasting hundreds of dollars every month on finance charges, which never affect the bottom line of what you owe. The good news is that you’re on the right path and searching for a credit card offer with a low (or 0%) interest rate on balance transfers is your answer. The goal here is to transfer all of what you owe on your high interest credit card to one that will give you a grace period with very low (or zero) finance charges. This will help buy you some time to save a bit of money and get your finances back on track.

You’ll find balance transfer offers from most of the big names in the industry and they will all have different terms involved, so get used to reading the fine print, all of it! It is extremely important to become very familiar with the terminology used on the applications and terms documents of credit card offers. The more you know the better you will be at spotting a good deal, and steering clear of a bad one. Lenders don’t really want you to know their business very well so once you learn more about it you are ahead of the game. For example, do you know the difference between APR and APY? We know you’ve seen both of those abbreviations in one place or another but do you know what they mean? Things like that are important to know when dealing with your own finances and when you’re searching for new credit card offers or loans. Most of these words and principles are equally important to know when you’re on the opposite side of the spectrum investing your saved up money. Then you become someone who wants a high interest rate on your returns, so it’s totally beneficial to learn all about the business of lending and investments sooner rather than later.