Balance Transfer Credit Cards
Balance Transfer Credit Cards: The new debt consolidation tool
Tired of having too many credit cards and unpaid debts? It need not be a worry any more thanks to balance transfer credit cards. Balance transfers offer a great way to consolidate your liabilities and pay off debts while saving costs. Sounds too good to be true? Well, it is true.
How it works
Balance transfer refers to a way of transferring outstanding balances from existing credit cards to one or more cards that offers a lower interest rate. Usually, there will be a balance transfer fee involved, which varies from company to company. However, most people have saved a lot of money with balance transfers. One can even transfer outstanding amounts of existing loans to another credit card.
The "catch" in balance transfer credit cards
Just like all good things, here too, there is a catch involved. Usually, the lower interest rate is for a promotional period. After this period expires, the balance transfer rate rises to the standard market rate – which can be quite high. Therefore, you need to ensure that you pay off all debts within the promotional period to avoid paying the higher balance transfer rate. Usually, these balance transfer schemes will include a promotional period of ‘free’ purchases – which is often referred to as a 0 APR (Annual Purchase Rate).
What determines the rate and promo period?
Several factors determine the balance transfer rate as well as the promotional low-interest period. Some of these factors include:
- Credit history: Banks will typically scrutinize a person’s credit history before deciding on which promotion to offer. Since balance transfers are typically carried out by people who already have existing debts, the comparison is superlative. Therefore, having an abnormal number of credit cards or too many outstanding loans may invoke suspicion from credit card companies.
- Default APR: The promotional 0 APR period is only valid if the cardholder pays on time and within the due date. Even in cases where the payment is made on time but cannot be honored due to insufficient funds or some other reason, the APR goes to the default market rate – which again is quite high.
- Exceeding credit limit: This is another reason the balance transfer rate may go back to the standard market rate.
- Less than the minimum due: Not paying even the minimum amount due by the due date can result in revocation of the zero percent rate.
- Factors affecting default rate: The default rate of the balance transfer or the purchases are based upon several factors such as:
- The duration in which the account has been open with the bank
- Frequency of defaults (if any)
- General usage on the account and spending behavior
- Consumer credit reports
Common jargon used in Balance transfer credit cards
Here are some commonly used terms in balance transfer, that can help demystify some of the language used.
APR – Also known as Annual Purchase Rate. This refers to the interest rate at which purchases can be made. In other words, any purchase made will be subjected to this rate. If a promotional interest is on offer for a certain duration, then the purchases will be subjected to the promotional rate; if the purchase is made within this time.
APR is determined by your credit history. So be sure to pay your bills on time and have a good credit standing or you likely will not have access to these types of offers.
Balance Transfer fee – This is a fee charged by the credit card company that is offering balance transfers. It is charged as a percentage of the total amount transferred.
Credit card companies will have a minimum and maximum percentage charge. The minimum charge will be applied no matter how small the transaction may be. You will never be charged more than the maximum percentage rate.
Credit limit – This is the maximum amount authorized to be used with a credit from the lending company. If exceeded, an over-limit fee is charged.
Credit card limits are determined by your credit history and your annual household income.
All in all, balance transfer credit cards offer a convenient way to keep track of liabilities under one umbrella.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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© 2019 Jason Nicolosi