Credit card balance transfers provide an opportunity for you to transfer all or a portion of a credit card or personal loan balance at a 0 percent or lower interest rate. This means you can save money on high interest payments while focusing on paying off your debt.
Credit card companies that offer balance transfers often provide ‘teaser’ rates to customers. This means your interest rate for the first months you have the credit card may be much lower than the subsequent year. If you are using a balance transfer to pay down debt, this fact means you must budget accordingly. This guide is designed to help you gain a realistic picture of what you will pay to maximize your balance transfer.
Step 1: Evaluate Your Debt
If you have multiple credit cards or personal loans, look at what you owe on each and the annual percentage rate or APR associated with each card. While you may carry a higher balance on one card, you could be losing more money due to a high interest rate on another card. Credit card companies are legally bound to inform you how much interest you have paid on your monthly credit card statement and how much interest is charged.
Once you decide what credit card balance to transfer, check with the credit card company whose card you are applying for. Some allow multiple balance transfers within a given amount of time, such as 60 days while others do not allow multiple balance transfers. If you are hoping to transfer balances from multiple cards always check to ensure this is possible.
Step 2: Read the Fine Print
When you apply for a balance transfer, you will be given a ‘teaser rate’ introductory percentage, such as 0 percent interest on balance transfers for 12 months. Your credit card company should also inform you the cost for a balance transfer fee. Some charge a flat fee, such as $5 or $15 to transfer money while others charge a percentage of the balance transferred.
For example, you have are transferring a $5,000 balance to a 0 balance transfer card for a period of 12 months. The credit card company charges a 3 percent balance transfer interest fee. This means you will have a $5,150 balance to pay off.
Ask your credit card company the exact date/billing cycle when the teaser rate will be up. This ensures you have not given yourself an extra month in your planning you may not have.
Step 3: Decide On Your Payments
Now that you know the overall balance and number of months you have to pay off the credit card, it’s time to calculate how much you should pay each month. While the credit card company will charge a significantly lower minimum payment, remember that if you do not pay off the balance transfer by the time the teaser rate is up, you will be subject to significantly higher interest rates.
If you owe $5,150 on your 0 balance transfer credit card, you may want to calculate your payments in terms of owing 11 months. This is to give yourself an extra time cushion should an emergency occur. For example, if you owe $5,150, you should pay about $470 a month for 11 months to fully pay off your credit card before the teaser rate changes.
Beware ‘The Catch’
One circumstance that could affect your abilities to pay off your balance transfer credit card is when you are using the card for purchases as well. Federal regulations say credit card manufacturers can apply the minimum payment toward the lowest interest balance, but the remainder must be applied to the highest interest balance.
This fact gets tricky if you come to the end of your introductory rate and have perhaps paid enough to pay off the balance, but still owe on your credit card because you have been spending. At this time, your credit card company can charge you higher interest on the retained balance transfer than on the money you spent in purchases since you opened the card. Having an interest rate of 20 percent or even more can quickly reduce all the benefits you worked hard to gain from the balance transfer card. This is why money experts recommend balance transfer cards only when they can be paid off in full given the teaser rate period.
About the Author: Laura Ginn knows that you should put some thought into your finances if you want to remain in control of your money. She also knows that by using the personal finance advice and guides on uSwitch she can find the best deal for any