Could A Balance Transfer Cure Your Credit Card Blues?

Do you find yourself singing the credit card blues because you’re up to you neck in credit card debt and can’t see any way out? There are several ways to cure those credit card blues and one of the most popular is to do a balance transfer.

How to do a balance transfer

If you’re not familiar with balance transfers they’re pretty simple. First, you find a credit card that has either a lower interest rate than the average of the interest rates you’re currently paying on your credit cards – or better yet get one of the new 0% interest balance transfer cards. You then arrange with the new credit card provider to have all the balances on your other cards transferred to the new card.

Tips for making a balance transfer

If you believe that doing a balance transfer would cure your credit card blues, here are some tips to keep in mind.

Tip #1: Be sure to find out if there would be a fee involved in making the transfer. Some credit card providers charge a 3% or even a 5% fee to make the transfer. This means that if you were transferring $20,000 in credit card balances and were hit with a 5% fee the transfer would cost you $1000 – which might wipe out any savings you would experience from making the transfer.

Tip #2: Calculate your current average interest (APR) rate. Before you really get serious about doing a balance transfer, you need to figure out your current average interest rate. The way you do this is by adding up your interest rates and then dividing this by the number of your credit cards. For example, let’s suppose you have one card at 12%, one at 18%, two at 19% and one at 20%. This would yield a total of 88% divided by five or an average interest rate of 17.6%.

Tip #3: Next, add up the payments you’ve been making on your credit cards. If you had minimum payments of $87, $103, $77, $206 and $165 (assuming your minimum payments are 1% of your outstanding balance) your total payments would be $638. Of course, if your minimum monthly payments were calculated at 2% of your outstanding balances, your total payments would be $1276.

Tip #4: Compare this with the new credit card. Let’s assume for the sake of the example that the new credit card would have a 12% interest rate. If you were to transfer $24,900 in debt to the new card, your minimum monthly payment would be approximately $498. At this point, you would need to ask yourself two questions. First, would you be able to handle that $498 minimum payment and second, how does that compare with your current monthly payments. In the examples given above, it would make sense to do the transfer because it could potentially save you roughly $140 a month ($638 – $498).

Tip #5: Try for a 0% interest balance transfer card
There are a number of these cards now available from the various credit card providers. The way these work is that you transfer your balances to the 0% interest balance transfer card and then pay no interest for some period of time. For example, we have seen offers for cards where you would pay no interest for six months and for cards where you would have 18 months before you would have to begin paying interest.

Tip #6: Check what your interest rate will eventually be, Of course, this introductory period of six, 12 or 18 months will eventually expire and you need to know what your interest rate will be when this occurs. Many of the cards that we have seen have interest rates that jump to 19%.

Tip #7: Try to pay off your entire balance. If you were able to get one of the 0% balance transfer cards, the critical thing is to get your balance paid off before your introductory period ends. That way, you would actually be debt-free. For example, let’s assume that you owed a total of $24,000 and were able to get one of those credit cards with no interest for 18 months. If you could pay $1300 a month on that new card, you would be basically debt-free before your introductory period ended – because that entire $1300 would go against reducing your balance instead of interest charges.

Understand the cons of a balance transfer

There are many pros to doing a balance transfer to help manage that credit card debt. Unfortunately, there are also some cons. For one thing, you may not be able to qualify for a 0% interest balance transfer card. The credit card companies typically make these offers only to people who already have excellent credit. Second, as mentioned above you could end up with a higher interest rate. This is because balance transfers usually have higher interest rates than purchases. Third if you have to pay a balance transfer fee you could actually lose money on the deal. And finally, it’s possible that a balance transfer could harm your credit score. The reason for this is that your score will take a hit any time you have a credit card with a balance 30% above your credit limit. So, if you were to move your balances to a credit card that didn’t have enough credit available, your score could drop.

Here is a video that also provides some good information about balance transfers.