If you are in any debt and have considered trying to find a way out, you may have come across the term balance transfer. You may be wonder what it means exactly, and why should you think about getting one. Can they really help you get out of debt? Are there any risks involved? The following information should give you the clarity you need.
What is a balance transfer and who should do one?
Balance transfer is the process through which the balance of one loan or credit card is moved to another account or credit card. Though anyone in debt might consider a balance transfer, there are two types of debtors who can really benefit from doing one. The first is those that pay multiple credit card or loan payments per month. Consolidating all of these bills into one can simplify your life and make it easier to get out of debt. The second type of debtor is one who is currently paying high interest on loans or credit cards.
Benefits of a balance transfer
One benefit is the simplicity a balance transfer offers. If you currently pay five different lenders or credit card companies, you have five separate payments and due dates to keep up with. Life is complicated enough without adding to it. With a balance transfer, all five of those debts could potentially be transferred to a new account, leaving you with only one payment.
Another benefit is lower interest rates. Most balance transfer accounts charge very low interest. Some of them also give you a 0% interest introductory period. The low to no interest is intended for you to be able to manage your debt better. All of this means that you can leave the high-interest rates you were paying behind, and you can probably begin to breathe again.
Downsides of a balance transfer
Unfortunately, there are a couple of potential downsides with balance transfers. The first is the fees you might be charged. Most balance transfer accounts will charge you a 3% to 5% balance transfer fee. If you are transferring a large amount of debt, your fee will be large, as well. However, that fee is likely nowhere near the interest you are being charged. If it is, you might want to rethink the balance transfer.
Another downside is that a balance transfer can affect your credit for a short time. Two important factors in your credit score are how long accounts have been open and the amount of available credit you are using. When you open a balance transfer account, it shows as a young account. Also, as the balance transfer is processing, your credit utilization shows as a higher percentage. Over a little time though, those negative effects will lose their impact.
A balance transfer can be instrumental in getting out of debt if you take the right steps. If you are approved for a balance transfer account, the lenders will work on processing your transfer. It can take anywhere from days to weeks during which you will still be getting charged interest. Until you are notified that the transfer is complete, continue to make your regular payments.
Lock your credit cards away and make no new charges. If your new account has 0% interest for a promotional period, start making plans to pay as much as you can during that time. Even if you cannot pay the full amount off during that period, anything you can pay off will be beneficial. Above all, be sure you make all scheduled payments on your new account so that you do not find yourself overwhelmed with debt again.
Wondering if a balance transfer can help you save money in the long run? Check out Credit Karma’s balance transfer calculator to see if you’re a good candidate.