01/03/2014
9 Things You Should Know About Balance Transfers
If you've racked up debt on a high-interest credit card, transferring the balance to a card with a lower interest rate may sound like an enticing way to save cash, but it's not quite as simple as it sounds.
Here's the scoop on nine things you need to know about balance transfers before you make the big switch.
1. Get a new card to pay the old.
When you transfer the balance from a higher-interest credit card to one with a lower interest rate, you are, in essence, paying off credit card "A" with new credit card "B."
For example, if you've been paying 13% interest on a $2,000 debt, you'd have to make a $347 monthly payment for six months to pay off the debt. Transfer that $2,000 to a 0% card and your payments will be $334, saving $77 in interest in the process. "The only real, solid, definable benefit from a balance transfer is you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate, including all your costs," says Mike Sullivan, director of education for Take Charge America, a Phoenix-based nonprofit consumer credit counseling company.
2. Consolidating simplifies payments.
Another reason to transfer balances to a single low-interest credit card is to simplify your financial life.
If you've maxed out multiple credit cards, can't keep payment dates and minimum payments straight and often accrue late fees, putting all your credit card debt on one card may be a good move. You'll have just one card to keep track of and one payment to make each month.
3. Transfer other kinds of debt.
It's not just balances from other credit cards that can be transferred. You may be able to move loans for cars, appliances, furniture and other monthly installment payments to a no-interest balance transfer credit card, using checks from the bank that issues the credit card.
4. Fees are inevitable.
It isn't quite as simple as making a swap from a high interest rate to a low interest rate anymore. You will almost always be charged a balance transfer fee, which is determined as a percentage of the total amount you're transferring. In the past, transfer fees were capped.
Today, on most balance transfer cards, there is no cap, so the more you transfer, the bigger the fee.
A typical fee in 2013 is 3%, so if you transfer a $10,000 debt from another card, you'll pay a $300 fee right away. Even if you have the cash to do so, it might or might not be worth it, depending on how much money you'll save on interest over the life of your debt. See if it makes sense for you using a balance transfer calculator.
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