Looking to swipe that card? Step back and think twice over. There are more than 1,300 million credit cards in circulation throughout the world. Factor in the amount of credit card debt in the United States alone and you’re looking at figures of over USD500 billion – a major cause for concern.
Truth is that credit card debt can reach unmanageable levels and spell financial doom long before you even come up with a repayment plan. With high-interest rates and compounding charges on offer, managing credit card debt is never easy.
But, if you’re up to the task of settling your outstanding dues and maintaining a good financial standing, you should explore the possibility of getting a balance transfer credit card.
What is a Balance Transfer Credit Card?
As the term suggests, balance transfer involves transferring your outstanding balance from your existing credit card to another that boasts a better repayment rate. Done usually to save on interest charges, the balance transfer facility can end up saving you quite a significant amount of money if done right.
Although there’s plenty of information available online as to which credit card is ideal for balance transfers, choosing the best card for you involves more than just looking at the transfer rate or the repayment period.
In fact, there are several things you’ll need to consider carefully before you choose a balance transfer credit card. Here are the most important considerations that you’ll need to make:
Your Outstanding Balance
The first thing to consider while applying for a balance transfer is to know how much debt you currently have and how much you want to transfer. This will help you know if you’re eligible for enough credit to cover your entire outstanding balance.
If your debt is spread over multiple cards, you can start by understanding the varying interest rates on each card. The card with the higher interest rate will most definitely be responsible for higher monthly payments. Prioritise this card for the balance transfer option.
Transferring Your Debt
When you get a balance transfer credit card, you’re only moving your outstanding balance from one card to another. So, you’re still in debt. While transferring debt is relatively easy, the hard part is repaying this balance in its entirety.
Whether you choose to transfer your outstanding balance or not, it’s important that you make your card payments on time. You’re only digging a deeper hole if you continue to miss payments for one reason or another. Keep in mind that transferring isn’t the same as repaying.
Consolidating Your Debt
A big benefit of getting a balance transfer credit card is that it helps you consolidate your overall debt. If you’ve got multiple card payments to deal with every month, transferring the entire balance to a single card can help you simplify your finances as you’ll only have one payment to think about.
Balance Transfers Aren’t Free
As with most other services, transferring your credit card balance involves additional fees and charges. You’ll either have to pay a one-time upfront fee or a transfer fee that’s spread across your repayment period.
That’s not all; any promotional rates you see won’t be around always. While you may have opted for a card based on its unbelievably low-interest rate, chances are that this rate is only valid for six months or a year. Thereafter, the interest rate will revert to type.
Additional Purchases
Getting a new balance transfer card doesn’t mean that you’ve got a new mode of payment to use. It’s highly advisable that you don’t make any additional purchases on your new card as you’ll only add to your overall debt.
Impact on Your Credit Score
Although transferring your outstanding balance doesn’t affect your credit score directly, it does have the potential to alter your financial profile, thereby affecting your score. When you transfer your credit card balance, you end up utilizing a large part or all of your available credit. This can affect your credit utilization ratio – a key part of your credit score.
Additionally, your score takes a brief dip each time you get a new credit card. If you’re planning for something bigger in the near future—a new home, a car, or even a business—it’s advisable that you refrain from opening a new credit account.
Once you keep these considerations in mind, finding the right balance transfer card can be a cakewalk. To begin with, compare your options on a financial products’ platform like BBazaar.my. Next, see which card suits your transfer needs and check its fine print thoroughly for associated fees or charges. Lastly, remember to choose a card that helps you get rid of debt, not add to it.
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This post is written in collaboration with Nidhi Mahajan —a partner of The Good Men Project.
Photo: Pexels