What to Know About Using a Balance Transfer to Consolidate Debt

It’s now possible to get balance transfer cards with as many as 18 or even 22 months interest-free. If you’ve racked up a lot of credit card debts, then transferring your balances to one of these cards could be a great way to consolidate your debt. Plus, you’d have all those months interest free to repay or at least pay down your debt. But important things exist you need to know before you rush off to apply for one of these cards.

It’s not the same as paying off your debts

There are definite benefits to transferring your credit card debts to a 0% interest balance transfer card, but it’s not the same as repaying your debts. All you’re really doing is moving one set of debts to a new card. Here’s an example of what this could mean. Let’s suppose you’ve been paying 13% interest on a $2000 credit card debt. In this case, you’d have to pay $347 monthly for 6 months to repay the debt. However, if you transfer that $2000 to a 0% interest card your payments would be just $334, a savings of $77 in interest. This means the only real benefit from a balance transfer is the money you’d save over the long haul – assuming you repay your entire balance before your introductory period ends.

It would make your financial life simpler

It can be tough trying to keep track of multiple payments that are all due on different days of the month, and that have different minimum payments. Transferring their balances to a new, 0% transfer card would mean remembering just one payment a month. This should definitely make your financial life simpler.

You’ll be charged a fee

You’ve probably heard the old expression that there is no such thing as a free lunch. Balance transfers aren’t free, either. You will almost certainly be charged a balance transfer fee, which likely will be a percent of the amount you’re transferring. In the past, transfer fees were capped but this is no longer the case. A typical fee this year is 3%. This means if you were to transfer $10,000, you’ll immediately be charged a $300 fee. You’ll need to calculate how much interest you’d save versus this fee to know if the balance transfer would really make sense.

That great 0% interest rate will expire

Unfortunately, that great 0% interest rate won’t last forever. It will eventually expire. This could be six months, 18 months, or even longer. But at some point, you will see your interest rate jump up, probably to something like 12% to 18%. If you haven’t paid off your balance before your introductory rate expires, you could end up paying more interest than before you made the transfer. Also, if you are late in making a payment or miss one, that great 0% interest rate will evaporate, and you’ll automatically be charged the higher rate.

Be careful with new purchases

That 0% introductory interest rate may not apply to new purchases as they may not be interest-free. Be sure to read the fine print as the rules of some credit cards stipulate that just the balances you transfer will qualify for the 0% rate, while new purchases will be charged the regular APR. Other cards will apply the 0% interest rate to new purchases, but maybe for just the first six months.

You could transfer other debts

One of the common misconceptions is that you can only transfer credit card balances. The fact is you may be able to transfer loans for appliances, cars, furniture, and other monthly installment payments. The way this is done is by using checks from the bank that issued the balance transfer card.

Determine how payments are allocated

Here’s where things get a bit complicated. If you have a 0% interest on the debt you transferred and an interest rate on new purchases, you can’t tell the credit card company how to apply your payments. The credit card issuers are required by 2009’s Credit CARD Act to first apply anything above the minimum payment to the debt that has the highest interest rate. However, most credit card companies will first apply the total minimum payment to the debt that has the lowest interest rate. This could lengthen the time it takes you to repay the debt, so the best idea is probably to steer clear of using the balance transfer card for new purchases.

You need good credit to qualify

Balance transfer cards are widely available, but the ones with the really great terms are available only if you have good or excellent credit.

In conclusion

Transferring credit card debts to a new one with 0% interest for some period of time could save you significant money – but only if you qualify. But if you can get one, that could be a great way to save money and get your debt paid off sooner, meaning it might be your best option.