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A balance transfer moves credit card debt from one account to another, typically to take advantage of a promotional zero percent interest period on the receiving card. Used correctly, it can allow aggressive debt paydown without interest accrual. Used incorrectly, it can leave the borrower in the same or worse position when the promotion ends. These six things help you use a balance transfer effectively.
The Promotional Period Has a Hard End Date
The zero percent rate on a balance transfer applies for a defined promotional period, typically twelve to twenty-one months. The day after that period ends, the standard interest rate on the card, often fifteen to twenty-five percent, applies to any remaining balance. The promotional period end date is the most important number in the balance transfer decision because it defines how much time you have to eliminate the transferred balance before standard rates apply.
A Balance Transfer Fee Applies to Most Transfers
Most balance transfer cards charge a fee of three to five percent of the transferred balance. A four percent fee on a $10,000 transfer costs $400 upfront. This fee must be factored into the total cost calculation alongside the interest savings from the promotional period to determine whether the transfer produces a net financial benefit compared to staying with the current card.
Is Credit Card Debt Relief Real? When Is It Better Than a Balance Transfer?
Yes, and it addresses a different dimension of the problem. Freedom Debt Relief’s credit card alternatives resource distinguishes between balance transfers, which reorganize the same debt at better temporary terms, and debt settlement, which reduces the total debt amount through negotiated settlements for less than the full balance. Debt settlement is appropriate for borrowers in genuine hardship who cannot manage their debt even at zero percent interest, while balance transfers work best for borrowers who can pay off the balance within the promotional window.
New Purchases on the Transfer Card Are Usually Not at the Promotional Rate
The zero percent promotional rate typically applies only to transferred balances, not to new purchases made on the card after the transfer. New purchases often accrue interest at the card’s standard rate immediately, creating a new interest burden alongside the balance being paid down. Using the balance transfer card for ongoing spending while trying to eliminate the transferred balance undermines the strategy.
Monthly Payments Above the Minimum Are Required to Clear the Balance in Time
The minimum payment on a balance transfer card during the promotional period is typically small enough that it will not retire the full transferred balance before the promotion expires. Calculating the monthly payment required to pay off the complete transferred balance within the promotional period, and confirming you can sustain that payment for the full duration, is the difference between the strategy working as intended and being left with a remaining balance at the standard rate.
The Application and New Account Both Affect the Credit Score
Applying for a balance transfer card generates a hard credit inquiry and opens a new account, both of which temporarily reduce the credit score. The reduction is typically modest and reverses over time, but borrowers who need to maintain or improve their credit score in the near term should weigh this impact before applying for a new card specifically for the transfer.
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Original source: https://homebusinessmag.com/money/credit-and-receivables/6-things-know-before-using-balance-transfer-pay-down-debt/