Are your high interest rates causing you to dig yourself deeper into debt? We’ve all been there at least once or twice in our lives. We receive what appears to be a great offer for a credit card, open the account, mismanage our spending, and eventually, end up in debt. What was once a $2,000 expense has over time turned into a $3,000 expense as the interest rates continue to add up. So what do you do? Allowing the problem to persist essentially means a ruined credit score, which in turn prevents you from borrowing in the future. A more effective solution would be to consider transferring the balance on your card to a new card with lower (or zero), interest rates. However, before you start applying, here’s a bit of information that would be beneficial to know in advance.
1. You’re Obtaining a New Card to Pay off the Old One
The concept behind balance transfers is removing the debt from the old and adding it to the new. For example, let’s say you have a high interest credit card asking you to pay 13% and you have a balance of $2,000; you’ll have to pay approximately $347 per month over the next six months in order to pay the debt down in full.
However, with a low or zero balance transfer option, you could pay 0 interest transferring a balance to your credit card. This means that your payments would be approximately $334 over the next six months which could save you about $77 in interest. It is important to keep in mind however, that this savings only works if you make timely payments.
2. Consider the Fees Involved
It is important to understand that zero interest does not mean that you will not incur fees of any kind. Most balance transfer credit card offers also apply a balance transfer fee that must be taken into consideration. This fee is determined based on a certain percentage of the balance you’ll be transferring to the account. As such, the larger the balance transfer, the larger the fee. According to Bankrate, the average balance transfer percentage is approximately three percent. So a balance transfer of $7,000 would result in an automatic fee of $210. You’ll need to determine whether the fee actually saves you money in the long run or not.
3. Find Out About Transfer Rate Expiration
The low interest rate you’re offered generally doesn’t last a long time. Therefore, if you’re going to take advantage of the balance transfer option, you’ll need to have a good idea of how long you have to pay off the debt at the lowered rate. Most credit cards offering balance transfer options will have an expiration date of six months to a year. You will also want to find out what the interest rate will be after the expiration date to determine whether or not that is a good option for you.
4. New Purchases May Not be Covered
It is not a good idea to apply for a new line of credit and then go and max out the new credit card as well. Many assume that their new purchases are under the low or zero percent interest rate; however, this is not always the case. When applying for a credit card offering zero or low interest rates be sure to read the fine print. Your new purchases may still incur interest rates each month.
5. Check Your Credit
If you’re looking to get zero interest on balance transfers, you’re going to need to have decent credit. Therefore, it is best to review your credit score prior to filing out applications. If your credit is poor, you may want to avoid applying as the inquiries will only worsen your credit score. However, if you have fair or perfect credit then you’re a likely candidate for low or zero interest rate offers.
Using balance transfer offers to pay down your massive credit card debt can certainly be an advantage to those who qualify. It allows you to save on interest rates, pay off your old debts, and work towards establishing better credit in the future. However, as with any financial decision, it is important to consider all the facts and make a decision solely based on what is most beneficial to you. With timely payments over the course of the next six months to a year, you will have successfully paid off your credit card debt and can celebrate by investing in something fun for yourself or the family.
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