A balance transfer can be a great move to put you ahead on your credit card repayments. Whether you’re drowning in debt or just a little bit behind, a balance transfer credit card can be just what you need to take back control. Companies set these up to try and lure you across from their competitors, and if used wisely, they can get you better rates and better service whilst consolidating your debt. Use caution because there can be high penalties if you miss a payment, so tread carefully.
How Low Balance Transfer Cards Work
Credit card interest rates vary anywhere from 10 to 20 percent per annum (often referred to as APR), sometimes more. With a balance transfer card, you can lock in a rate of 0 percent APR for up to two years if you’re lucky. Most providers will charge a balance transfer fee of 2 to 3 percent of the amount transferred. This gives you a window of time to pay down the debt without incurring any additional interest.
You can easily save close to $1,000 on a $5,000 transfer while giving yourself some breathing room to pay down your debt. The effect is far more pronounced with larger debts. For example, if you have $15,000 in debt, you will pay approximately $225 when you transfer to the new card. This is less than a single month of interest ($250 at 20 percent APR), so while you are taking a small step back, you can very quickly recoup that cost. Over a 12-month period, you could save almost $3,000 with a balance transfer. By consolidating your debts and paying down the highest interest debt first, you can knock years and thousands of dollars off your repayments.
Balance transfer cards also come with some risks you should be aware of before diving in. The wrong card may come with hidden fees that end up costing you more than your original repayments, or an annual fee that unexpectedly wipes out your savings. For example, if you only have $1,000 in debt and apply for and receive a balance transfer card with a 1.5 percent balance transfer fee and $149 annual fee, it will cost you more in fees than you could save on that particular debt.
You should also have a plan in place to pay down the balance before the end of the 0 percent grace period. Sit down and develop a budget so you can be sure exactly how long you need to pay off the balance. If you cannot pay down the debt within a year, opt for a card with a longer grace period.
New purchases on balance transfer cards are often at a higher rate than a standard credit card. Any purchases made with your new card will attract the high interest rate, and most providers will make you pay for the new purchases before putting any payment towards the transferred amount. If you had a habit of overspending on your old cards, carrying this behaviour over to a balance transfer card can put you in hot water. Once the grace period expires any amount left over from your balance transfer will start accruing interest at the same high rate.
A balance transfer can be an extremely powerful debt elimination tool when used correctly. Check all the terms and conditions and have a solid plan in place before signing on the dotted line. With the right strategy, you can put hundreds of dollars back in your pocket, not to mention regain some peace of mind.