A balance transfer is a transaction in which you pay off one loan with another. In the particular area of credit card balance transfers, this process allows you to pay off a high interest rate credit card, or numerous lower balances, with one new line of credit. By taking steps to use this type of method to pay down your debt, you can benefit in numerous ways.
How The Cards Work
In a balance transfer credit card application, you can note that you would like to pay off the balance of other credit cards with your new card. This gives the creditor the ability to extend you a larger line of credit in an effort to get some of your business away from other lenders. Consider this. If the credit card company can earn interest on the debt you already have, why not do so? However, there are other advantages to paying off old debt with new credit cards.
Depending on the type of card you select, and the costs associated with the card in general, you may find that a balance transfer is the best way to save money. If you are in the market for a new credit card, for example, you may want to consolidate your debts from several lenders onto one, new card. This makes paying your monthly bills easier since all of your debt is in one place. However, an added benefit lies in the interest rate.
Secure A Low Interest Rate
Some balance transfer credit cards give you a low interest rate to start with when you open the account. There are several options to keep in mind here, and they do require credit qualification.
- Some companies allow you to get a very low interest rate that will remain with you long term. This may be the rate you pay on all borrowed funds.
- Some companies may extend a special, low introductory offer, such as zero percent APR on balance transfers for a limited amount of time.
- Other companies may charge a different rate for balance transfers than for standard purchases. This rate may be higher (often due to the higher risk the lender takes and the added fees associated with the card.)
If you are able to qualify for a low interest rate credit card, use it to your advantage. To do this, transfer the balances from other, higher interest rate cards to your new card during the introductory period. Pay off that balance during that time. That way, you may pay no interest (if you qualify for a zero percent interest rate) to pay off the money you already know.
Be Warned - Fees May Be Present
While balance transfers can be a good thing, they can be expensive. Some companies will charge a fee for a balance transfer, which could be a percentage of what you transfer, a fixed fee or a combination of both. These fees are often administrative fees, specific fees associated with the service of transferring the funds.
Who Should Use These Cards?
Many people will benefit from the use of balance transfer cards. However, some may not. Determine what the interest rate of the card will be after the introductory period. If you are already paying a lower rate, it may not be beneficial to transfer that balance. Look at the fees, too, to determine if it makes financial sense to make the transfer. In addition, you will have to qualify for a larger loan by having a higher credit score. Some lenders will not extend balance transfers to those who have poor credit history, no employment or other risk factors.
How To Get Started
The best advice for anyone considering a balance transfer, whether on a current card or on a new credit card, is to compare offers. Get the best price possible by learning what your options are. Just because one lender charges a high fee does not mean another one will do the same thing. It is up to you to ensure that you get the best rate possible associated with the card, or with the balance transfer itself. You can get quotes and additional information without obligation, too.
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