There are a number of different ways to consolidate debts. And transferring balances is one of them – assuming that all of your debts are credit card debts. If so, then balance transfers can be an incredibly good way to manage credit card debt. The way this works is that you move your debt from cards with high interest rates to one that has a lower interest rate or no interest rate at all. No interest rate at all? How can that be? These cards are called 0% interest balance transfer cards because they require no interest payments for anywhere from 6 to 18 months, depending on the card you choose. If you were to use this introductory period to make some really big payments, you might be able to actually emerge at the end of that six or 18 months debt free.
Stay up with your payments
Don’t stop making payments to your other credit cards while you’re waiting to transfer their balances. You want to ensure that you keep up with all of your payments as this will allow you to sustain great credit and then get a balance transfer card with the best possible terms. Your best choice for a balance transfer card could actually be a card you already have if it offers a lower interest rate than your other cards. Or it could be a new card with a 0% APR balance transfer offer.
Read the fine print
Before you make that balance transfer, be sure that you understand all the conditions and terms of the new card. It’s important to know its credit limit, the interest rate you will be charged and if there is a balance transfer fee. These fees are usually 3% of the amount you transfer but can be something else. Some cards have 0% interest introductory balance transfer offers and no balance transfer fee. On the other hand, others can have a fee of 5%. Supposing you were to transfer $20,000 to a new card with a 5% balance transfer fee. This would cost you $1000, which might actually eliminate any savings you would have gotten from making the transfer. In addition, you should know how long you’ll have to complete transferring your balances and how long the promotional 0% interest period will last. And do understand that despite what their terms might imply, some organizations will not allow you to transfer balances between their own accounts or credit cards.
If you’d like more information about the pros and cons of a credit card transfer, watch this video.
Create a plan
Before you transfer your balances to that new card, create a plan for how you will pay down your debt. Keep in mind that once your introductory or promotional period ends, an interest rate will kick in and could be as high as 19%. Make sure you have a plan for paying down your debt or a balance transfer will be just another way to postpone your obligations.
Doing the transfer
You will need to contact the credit card company to which you’re transferring your balances and ask it to do the balance transfer. Be ready to provide account information for the other credit cards and the total sum that you want to transfer.
After you have made the transfer
You should keep making the minimum payments required by your old credit cards unless you have paid off all your debts. In this case, get a letter or statement from your credit card companies showing that you have paid off your entire balances. A good idea is to let your old accounts remain open as this will help you maintain a low credit utilization ratio, which in turn can boost your credit score.
Some other tips for doing a successful balance transfer
• Look for 0% on both balance transfers and purchases
• Be choosy. Don’t let a teaser rate blind you to the card’s other features
• Make sure “free” really means free. As noted above, some credit card issuers charge fees for each balance you transfer to their card
• Pay on time every time. Pay late just once and your low teaser rate will likely go away.
• Stay organized. Take note of when your 0% deal will end and mark it on your calendar
• Know when to fold ’em. Credit card companies can see when you’re trying to fool them and will see your pattern of jumping around
Stick to your plan
Transferring your balances will not help your debt situation unless you have made and stick to a plan to pay off your debt. You need to recognize the fact that you will probably not be able to take advantage those of 0% interest offers time after time. That’s only moving your debt while doing nothing to eliminate it.
As mentioned above, the best thing you could do is use your introductory or promotional period of 0% interest to pay off your debt. If this is not possible, you might think about consumer credit counseling. This is where you have a counselor who will analyze your finances and help you develop a debt management plan (DMP) for paying off your debts. This person would review your income and debts and also help you develop a budget that would lead you to becoming debt-free.
Where to find credit counseling
Almost every town and city has a consumer credit counseling agency. Colleges, universities and even credit unions often offer consumer credit counseling. If you feel you need this type of help, be sure to choose a nonprofit credit-counseling agency that either charges nothing or a very low fee for its services.
It’s also possible to find credit counseling companies online. If you select this option, be sure to choose one that doesn’t require big fees upfront. Also, stay away from any credit counseling service that promises to loan you money to pay off your debts. This might be a trap that would lead you into even worse debt. The purpose of credit counseling is to help you reduce your debts and not increase them. You should also do your “homework,” which is to carefully review any credit counseling company before you sign a contract. You will want to see how long it’s been in business, its rating with the Better Business Bureau, its affiliations and, most important, it’s online reviews. Virtually every credit counseling company has negative reviews as that’s just the nature of the business. But if you see the company has more negative than positive ones, stay away from it.
Read your contract
Last but certainly not least, if you contract with a company to provide credit counseling, make sure you read your contract very carefully. You need to know exactly what the company will do and your obligations. In the event the company refuses to put everything in writing, run do not walk away from it.