A balance transfer is one of the most effective strategies that you can use to get out of debt. This is actually a great debt relief option for people with multiple high-interest credit cards. It gives you the chance to consolidate credit card debts into one. Not only that, it helps you deal with the high interest rate. It specifically helps you save money as you pay off your debts.
But just like all debt relief options, you need to know how to do it right to be successful at it. If you really want your financial future to be secure, you have to do more than just pay off your debts. You have to make sure that every payment will also help position your finances towards the future that you want to have.
For instance, if you intend to buy your own home after you pay off all your debt, you have to make sure that your credit score is high. That means your debt relief option should help you build up a good score.
Using a balance transfer card as a means to consolidate credit card debts is effective but it requires certain strategies to ensure that you will be successful. It can help build your credit score. But if you make even one wrong move with it, you can easily destroy all your hard work.
This debt relief strategy involves a new credit card that is offered with a 0% introductory rate (or a very low one). So if you transfer your other credit card debts, every payment goes to your principal debt and none of it goes to the interest. At least, it will until the promo expires. It will help you save a lot of money.
Different strategies that will make balance transfer successful
When you consolidate using a balance transfer card there are different strategies that can be used to ensure that it will succeed in improving your finances.
Choose what to trade off: balance transfer fee or longer promo period
First of all, you do not transfer your balance without a fee. You need to pay for the transaction. This is called a balance transfer fee. According to statistics, the average balance transfer fee is 3.46%. That means transferring $1,000 worth of debts would mean you have to pay $34.60. If your debt is $10,000, that means paying $346 for the transfer. As it gets bigger, people in debt start to think twice before paying it off.
Fortunately, there is a way around this fee. You do not have to pay it off but that would mean the promo period will be shorter. For instance, if you pay the transfer fee, the 0% rate can last for more than a year. But if you opt not to, it will be shortened to only a few months.
You need to choose which of the two will help you save more. Knowing how much of the debt you can pay during the promo period will help you decide. If you cannot pay it all before the promo expires, it might be best to pay the balance transfer fee so you have a longer time to pay off the debt.
Aggressively pay debts during the promo period
Another strategy that you can use to ensure that the balance transfer will be a huge success is to aggressively pay your debts within the promo period. As mentioned, the 0% interest rate is only valid until the promo expires. If you want to really benefit from this debt relief option, you might want to make sure that you increase your payments significantly while the 0% interest is still in effect. The bigger payments will shorten your repayment period. Since your payments are mostly going to the principal balance, it will help you achieve debt relief faster.
Avoid using the card for new purchases
The last one is not really a strategy to help pay off your debt. It is more of something that you have to avoid compromising debt relief success. The balance transfer card is still a credit card. That means you can use it for new purchases. It can be tempting but you need to curb the urges to use it. While the debt that you transferred has a 0% interest rate, this is not applicable to new purchases. Most likely, it has a high-interest rate – just like your previous credit cards. So if you want to make the balance transfer a success, keep yourself from using it on new transactions.
Facts about balance transfer that can affect your payments
As you try to pay off the debt you transferred, there are a couple of things that you need to remember about a balance transfer card. These can affect your payments – whether it is a positive or negative effect will depend on you.
Your credit score matters
First of all, this is a credit card so your credit score will still matter when you apply for it. Even if the creditor approached you with an offer, it does not mean you will be approved of it. If your credit score is low, there is still a chance that you will not be approved. There are still a lot of people with a really bad credit score. The lowest is 300 and statistics reveal that of the 200 million consumers with credit score, 20,000 of them have a score of 300. It is not likely that the creditor will approve the balance transfer if you have a very low score.
Keep paying until after the transfer is complete
While using a balance transfer card is promising, do not stop paying you usual debts until after you are given a formal notification that the transfer had been completed. Your application will still go through a process to determine if you qualify for the card. If not, then you will not be approved. If you stopped making payments, your original debts will incur late penalties. That will just make your balance bigger.
It is okay to have a low introductory rate
You should also stop focusing on the 0% interest rate alone. Sometimes, these have high annual rates, short promo periods and high balance transfer fees. Make sure you consider all these factors when making a decision on your balance transfer strategy. Even if you cannot find a 0% rate, as long as you will still save a lot because of the annual fees and other charges, then it might still be all worth it.