A balance transfer is essentially a process that allows you to transfer your existing credit card’s outstanding balances to a new card. According to Investopedia, credit card balance transfers are typically used by consumers who want to move the amount they owe to a credit card with a lower interest rate. By parking all your outstanding balances under a single account with structured repayment, you may find it easier to pay off all your credit card debt. Credit cards that are designed to meet such needs are called balance transfer credit cards.
A balance transfer credit card is relatively straightforward to understand and use. Depending on your new card issuer, you can either apply for your balance transfer together with your balance transfer credit card or after your credit card application is approved. Your new credit limit and transfer limit will determine the amount you can transfer.
Applying for a balance transfer credit card may affect your credit score in a few ways. For starters, applying for a new line of credit may deduct some points from your credit score. However, the effect of constantly missing your due payments to your outstanding balance would be worse for your credit score. Balance transfers can then help you restructure your repayment across a longer time frame and at lower interest rates. This means that in the long run, a balance transfer credit card may actually be beneficial to your credit score. That said, you must ensure that you pay off the monthly repayments on time.
Aside from your credit scores, there are also some other factors that you should take note of. For one, always remember that transferring your existing credit card debts to a balance transfer credit card is not the same as repaying your debt. Essentially, what you are doing is moving your current debt from a venue that charges you with a higher interest rate to one that charges you less. Additionally, consolidation of your debts under one card – especially if you have multiple outstanding balances – can vastly simplify the process of your debt repayment. Instead of having to make multiple payments, now you only need to do one. Lastly, balance transfers are not necessarily limited to credit card debts. Some balance transfer cards may also let you transfer debts from loans.
Before you apply for a balance transfer credit card, be sure to check a few important things. For instance, one of the most important would be the interest rates of the amount to be transferred, and the other being the presence of any one-time charges upon approval of the balance transfer to your new card.
Most of the time, balance transfer interest rates are much lower than standard credit card interest rates. However, note that if you miss a repayment, the outstanding amount will be charged as per the standard credit card interest rates until you complete the missed repayment.
Addition to that, it’s best practice to read through the terms and condition thoroughly so you understand important details such as penalties for late payment and exceeding the credit limit.
Some banks offer an introductory promotion. Look out for those to enjoy lower interest rates for a period of time.
When used prudently, balance transfer credit cards can be an extremely useful financial tool to help you manage your cash flow. Before deciding on an option, though, do your due diligence and compare the different cards available to you so that you do not incur any additional or surprise charges.
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