Balance Transfer Credit Card - Pros and Cons
A balance transfer is a method of transferring debts with high-interest from one or more cards to another card with a lower rate of interest. This will assist you in clearing your debts quickly because more of the payments will go towards your principal balance every month rather than towards the interest charges.
How does the Balance Transfer Function?
The individuals can apply for the facility of balance transfer when they apply for a fresh credit card or wait till the time they are approved. Though generally, it is best to get the process initiated as quickly as possible. They should just know the account number for the existing balance and the amount they wish to transfer. The new credit card issuer will approve the entire amount or only a portion of it, based on the credit limit and the transfer limit of the provider. After the transfer is done, you will make payments to the new creditor.
The following are the three main elements to be considered in a balance transfer credit card.
After the promotional period of the credit card ends, you will have to pay interest at the go-to-rate of the card. It is important to keep this rate in mind in case you are unable to clear your debt within the introductory duration. It may be even higher than the current rate of interest.
Introductory APR Duration
A lot of balance transfer credit cards give you a chance of making no-interest payments for certain months on the transferred balance. Once this introductory duration comes to an end, you will have to pay interest on the remaining balance. So, you need to assess whether you can realistically make a dent in the balance during the offered time.
Fees on Balance Transfer
There are many credit card providers that levy a fee for the balance transfer. This amount gets added to the total balance.
A balance transfer facility sounds like a good opportunity for enjoying a few months without interest on the credit card. However, before you jump on the opportunity, you must go through the pros & cons of transferring your balance. It may not turn out to be the cut and dry facility like you assumed.
Pros of Transferring your Balance
Listed below are some of the advantages of opting for this facility.
A lower rate of interest on your credit card
You can enjoy this benefit on your balance transfer credit card, especially if you are paying a high rate of interest on the credit card amount you are planning to transfer. The facility of balance transfer with a lower rate of interest will give you the chance of making a bigger dent in the balance of your credit card.
Since you have a lower rate of interest, and probably no finance charge, more part of your payment every month will be directed towards reducing the balance on your credit card, rather than towards interest. You may also be able to clear your entire balance by the end of the promotional period.
Moving the balance to a card offering better terms
In case your present credit card offers bad terms such as a short grace period, high charges, you have the option of moving your balance to a credit card that offers better terms and closes the old card account permanently. The new card may also offer rewards on the purchases you make using it.
Consolidating the debt on your credit card
You have the option of consolidating the debt on your credit card, leaving you with lesser card payment to make monthly. You can skip the hassle of multiple payments on your credit card to many different cards by moving multiple card balances on one credit card. The condition is that the credit card should have a sufficient credit limit. It is comparatively simple to clear one credit card balance as opposed to clearing several.
Cons of Transferring your Balance
Listed below are some of the disadvantages of opting for this facility.
Being charged a higher rate of interest
You may end up paying a higher rate of interest in case you do not qualify for the promotional rate of interest. Not every individual is eligible for the promotional interest. Typically, you should be having an amazing credit score for enjoying a low rate of interest balance transfer facility. Otherwise, you will be eligible only for the higher interest rate for a balance transfer.
Balance Transfer could get costly
Taking the fees for a balance transfer as well as the annual fee into consideration, this facility can get costly if your credit card offers one. Before transferring the balance, you must ensure that you factor in the entire cost involved in moving the balance and compare it to the interest amount that you will have to pay if you leave the balance on your previous card. In the long run, leaving the balance on your old credit card may involve a lesser cost.
Your credit score may get affected
Choosing a balance transfer credit card can have an impact on your credit score. In general, your credit rating can get impacted by applying for & opening a fresh credit card account. Not just this, the credit score is affected anytime you hold a card with a balance above a certain credit limit. In case you transfer your card balance to another, which does not have adequate available credit, it can lead to a drop in your credit score. The good part here is that you can reduce the balance by making timely credit payments every month.
To Sum Up!
Although there are some disadvantages of opting for a balance transfer to a new card, you must consider how it will impact your finances in the long run. In case you ultimately end up saving more money and paying off the balance on your credit card faster, then transferring the balance to a new credit card will be worth it.