Do you want to use a balance transfer to consolidate debt? It can be an effective way to get out of debt. However, you have to make sure that you understand how to use it well. There are risks involved in using this particular debt solution. If you make the wrong move, you might end up with more debt than when you started.
This debt relief option is best for consolidating credit card debt. A balance transfer card is usually just a new credit card that is offered with an introductory 0% interest rate. This promo lasts for 6 months to a year. If you are lucky, you might even stumble into a longer one. Obviously, you want to get the one with the longest promo period. This will help you save a lot especially since credit cards are notorious for having really high-interest rates. Even if there is a fee (usually 3% of the balance that is transferred), the savings usually exceed what you paid for.
Two rules when using balance transfer in consolidation
If you really want to consolidate your credit card debts through a balance transfer, you need to remember and follow two important rules.
Pay the balance within the introductory period
First is to create a repayment plan that ensures you can pay the balance within the introductory period. This is why you need to aim for the longest 0% interest rate promo period that you can find. The longest is usually one year. If you can get that, it will give you more time to pay off the balance of your debt. During this time, there will be no interest amount that will be added to your debt. All your payments will be credited to the principal balance.
If you consolidated high-interest credit cards, this would result in huge savings on the overall debt that you paid. The average interest rate of credit cards is between 15% to 20%. This is the interest that will be removed after you consolidate it. Even if the balance transfer fee is considered, it would still be a huge amount of savings.
In case it will be hard for you to complete the whole balance within the promo period, you have to target to pay off at least a significant part of it. That means you should live a frugal life while you are within the period. Use what you can save and add it to your debt payments.
Do not use the card for new purchases
Another rule that you have to follow strictly is to avoid using the balance transfer card for new purchases. Although you used it to consolidate your multiple debts, it is still, in essence, a credit card. And when it comes to any type of credit card, American consumers love to use it. In fact, reports reveal that the use of credit cards has increased over the years – even after everything we’ve been through during the Great Recession.
Just because you can use it, that does not mean you should. The 0% introductory rate is usually exclusive for the balance that you transferred. It does not include new purchases. When used for purchases, it will have a high interest rate. That can compromise the amount that you just saved with the 0% rate. Just keep the card and use it only to pay down your balance – nothing else.
If you failed to pay the balance before the 0% interest expires…
While it is ideal to pay your balance within the promo period, there are times when it is impossible to achieve. It is either you have a really high balance or you cannot produce enough funds to pay it all off in time. That is okay. As long as you did your best to pay the highest amount that you can afford, you should be proud of yourself.
But then again, this only means you still have to work hard to completely be free from debt. Here are two things that you need to do so your efforts so far will not be wasted.
Come up with a new repayment plan
First of all, you need to come up with a new strategy to pay off your balance. With the promo period ending, whatever is left of the debt will now be subjected to the high-interest rate of the balance transfer card. You need to know what this new rate is so you will know what to expect. You can choose to increase or decrease your monthly payments according to the changes in your debt. If you want to save money, you should opt for a shorter repayment period. Take note of the amount that you need to pay and do not stick to the minimum payment requirement. Set an amount that you will pay – ideally a bigger amount than the minimum so you can get out of debt faster.
Refrain from adding to the balance
While you are paying off the balance transfer card, you need to keep yourself from adding more debt. It is not just for this card. You should also refrain from using your other credit cards. The only time it is okay to use your credit cards is when you are sure that you can pay the balance in full when the billing statement comes. Or once you have completely paid off your debt. If not, just settle for using cash until you achieve debt freedom.