Have you ever found yourself struggling to manage credit card debt, overwhelmed by high-interest rates and multiple payments? If so, just know that you're not alone.
Debt can be a major shadow that follows many people around their lives, rearing its ugly head in moments you'd never expect.
However, there's a slightly unexpected solution that many people can take advantage of to gain an upper hand on their current debt status, even allowing you to save a bit of money in the process: balance transfers.
Throughout this article, we'll aim to break down all you need to know about this financial tool, including how they work, why you should consider using it, and all the ways they can assist your current financial situation.
Whether you're trying to make headway on a seemingly never ending pile of debt, or simply just trying to reduce your interest payments, balance transfers may be the answer you've been searching for all along.
What Are Balance Transfers?
So, what exactly is a balance transfer?
Put simply, they're just a process that allows you to shift the debt from one lender to another.
Look at it this way — if you've got multiple different credit cards, you're probably going to have varying rates of interest with each one of them, as no bank typically offers the exact same interest rates.
Let's say, hypothetically, that you've got a load of debt with one credit card, and they're charging an excessive amount of interest on it.
Moving the debt from one credit card to another one with lower interest rates means you can stop paying as much interest, allowing you to not only consolidate multiple debts into one, but also pay this total sum off much faster.
How Do They Work?
To transfer balances, you'll first need to find a credit card provider that has a fairly notable reduction in their interest rates compared to whomever you currently bank with. After this, you just need to apply for the balance transfer and give the bank the account numbers and balances of the cards you want to transfer.
Once your transfer has been approved by both banks, the new credit card company you've partnered with will pay off the credit card balance on your old cards and transfer the debt into your new account with them (the one with lower interest rates).
Now, you'll just need to pay the new company the amount of debt you still owe, plus the balance transfer fee if there's any associated with the switch.
Benefits of Balance Transfer Credit Cards
There's no worse feeling than feeling like you're stuck in a never-ending cycle of payments.
Every month, you make your minimum payment, but your outstanding balance barely seems to budge because of all the interest charges piled on top of you.
It's frustrating to deal with, but let's explore how balance transfer cards can mitigate some stress for you:
Save Money on Interest Rates
Possibly the largest driving factor of why anyone would want a balance transfer card is the ability to save money on interest rates.
When you transfer high-interest debt to a card with a lower interest rate, you'll ultimately end up having to pay less total interest. That means you can keep your regular repayments lower, or keep them the same and pay the debt off faster.
For example, let's say you've got a £10,000 balance on a credit card and they're charging you a 25% APR. If you make the decision to transfer this balance into another card that's offering 0% introductory APR for 12 months, you could end up saving £2,500 in interest charges over the year!
That's not something to be taken lightly — being able to be interest free for a whole year provides you with a substantial financial platform to pay your debt off faster, and is undoubtedly a marked improvement on your current situation.
Simplify Your Finances
Aside from just being able to pay it off faster, you can actually make your finances so much simpler to deal with by consolidating the debt into one location. It's not just the stress of the money you owe, but having various different accounts with multiple credit cards, each with their own due dates and interest rates, can be incredibly challenging to keep track of.
When you stop having to mess around with a bunch of different banks, you'll only have to make one payment each month and only have one interest figure to keep in your mind. Needless to say, this can make budgeting and staying on top of all your finances far easier to deal with.
Improve Your Credit Rating
Finally, you can also improve your credit score by performing a balance transfer. How? Well, when you transfer debt from a high-interest card to a new one that has a lower interest rate, you'll potentially be reducing your credit utilisation ratio. This ratio is the amount of credit you're using compared to your total credit limit.
In previous articles we've discussed how alongside payment history, credit utilisation is a leading variable when it comes to assessing your credit-worthiness, and the lower your utilisation ratio, the better it is for this score.
Having a poor credit rating can actually follow you through your life. If your credit score is low, you'll find that applying for things such as mortgages, loans, or even switching bank accounts becomes far more challenging to do.
Banks don't trust you as much when you have a history of debt and late payments, meaning it's very much in your interest to do all you can to improve your credit rating.
How to Choose a Balance Transfer Card
Now that you know some advantages to applying for one of these cards, let's go over some of the things you need to keep in mind when looking at your options:
Introductory APR Period
As touched on briefly before, the most significant selling point of one of these cards is usually the introductory APR period. This period typically lasts between around 6 and 18 months, and means that you don't have to pay a single percentage of interest on transferred balances in this period.
Depending on how inundated you've been with debt, the phrase “0% balance transfer interest” should be music to your ears.
Just make sure you're choosing a card with an introductory period long enough to let you pay off your balance without accruing any further interest.
Balance Transfer Fees
Depending on who you decide to partner with, you may end up having to pay a small fee to transfer a balance from one card to another. Obviously, paying any additional fees on top of the debt you're already in is not exactly ideal, which is why it's so important to shop about for different rates.
This fee can range from around 3% to 5% of the total balance that you're transferring, so make sure to factor this in when comparing cards.
Ongoing APR
Once the 0% interest introductory period is over, the card's ongoing APR will kick in, marking the end of that beautiful honeymoon phase.
Obviously, it wasn't always going to be this way, which is why it's essential that you're choosing a balance transfer credit card with a reasonable ongoing APR so that you can avoid paying high interest rates on your remaining balance.
Credit Limit
Depending on the credit limit of the balance transfer cards you're looking at, the amount of debt you can transfer from your old loan, overdraft or credit card (with high interest) can differ.
When you're making your decision, just be sure to choose a new card that has higher credit limits than whatever your current debt amount is.
Rewards & Perks
Although you're probably solely focused on paying your debt off, (which you should be), some balance transfer cards offer rewards programs or perks, such as cash back or travel rewards.
If you're interested in things like this, pick one that aligns with your spending habits and rewards preferences.
How to Make the Most of Your Balance Transfer
Yes, you're ultimately using your balance transfer cards to minimise your monthly payments and pay off your debt faster, but to make the most out of it, you need to know how to manage it effectively.
Here are a few tips to ensure you're using your card to its full capabilities.
Making Timely Payments to Avoid Late Fees & Penalty Rates
Because the promotional rate is only valid for a certain amount of time, you'll need to make your payments on time every month if you want to keep a low interest rate.
Anytime you make payments that are late or incomplete, the bank's going to charge late fees and penalty rates that can offset any of the savings you've made from the balance transfer in the blink of an eye.
To avoid things like this, try to set up some automatic payments first or set some reminders to do so at the very least.
Strategies to Pay Off Your Balance Transfer Before the Promotional Period Ends
To reiterate, after the low interest promotional periods have ended, you'll be straight back to paying the high interest rates that got you in this mess to begin with. This means you only have a relatively short window to make the most of it and pay off your debt before you've got even more fees stacking up.
To do this effectively, you're going to have to be both disciplined and focused. We suggest starting out by creating a budget or plan that allows you to make larger payments than the minimum amount that is due.
Do your own research first, but you could consider using any windfalls, such as tax refunds or bonuses, to make extra payments and avoid falling into another trap.
Avoid Making New Purchases on Your Balance Transfer Card
While you're still paying off the balance transfer, it's highly recommended that you steer clear of making new, everyday purchases on the same card. Whenever you make a new purchase, you're adding to your balance, which subsequently increases the amount of interest you'll have to pay.
Obviously we want to avoid that, so if you need to make a purchase, it's probably best to use a different credit card or cash.
In addition, it's also a wise move to remove your balance transfer card from your wallet or mobile phone to avoid the temptation and accessibility of making new purchases. You can also achieve this by setting a low credit limit on your account.
Final Thoughts
To wrap things up, we can emphasise enough the importance of taking swift action to deal with debt so you can go back to living a happy life free from financial stress. Let's be realistic, though; while balance transfers can be a useful tool for managing credit card debt, they are not a solution in and of themselves.
Firstly, you've got to recognize that there is a problem and ultimately take responsibility for it. Yes, this may involve making difficult decisions about spending, such as cutting back on non-essential expenses, but sacrifices must be made on that road to financial security.
When you're creating debt repayment plans, you always want to ensure you're monitoring your progress regularly so that you're staying on track. Set goals for yourself and track your progress towards those goals over time.
Try to celebrate all of your successes along the way, no matter how small, and keep yourself motivated by reminding yourself how close you are to finally having your life back.
Finally, let's not forget that becoming debt-free is a journey, not a destination. It takes time, patience, and persistence to achieve this goal, but it is well worth the effort.
Related Guides:
