Balance Transfers – Simple Solution or Debt Enhancer?
Posted: February 3rd, 2011 | Author: Joe | Filed under: Credit, Debt, Tips | Tags: 0% balance transfer, Credit Cards, Credit Debt, Debt, getting out of debt, Guest Post | 1 Comment »A balance transfer credit card is a tool that can be used either effectively or haphazardly as a debt relief solution. A consumer has an opportunity to relieve some of the burden of debt but in many cases, the balance transfer card is too much of a temptation that results in even more debt. Should balance transfer cards be considered a solution to consumer credit card debt?
Here’s a look at how things work:
Understanding Balance Transfer Credit Cards
Credit card companies issue balance transfer cards to a target market of consumers who actively use credit cards. The balance transfer cards typically offer a low (or no) interest rate for a promotional period of time – usually 6-12 months. A consumer can use the balance transfer cards to move existing credit card balances to one card and consolidate the amount of credit card payments they make each month. Provided a card holder can pay off the entire balance placed on the new card at the lowered interest rate within the promotional time period, a balance transfer credit card can be a valuable tool for debt elimination.
Understanding the Risk of Balance Transfers
While the resource can be ideal for some consumers, there are also risks associated using this tactic. Traditionally, using other credit cards to pay off credit card debt has been known to start a vicious cycle of bad debts. However, if there is a sufficient plan in place for effectively paying off the total balance before the low interest rate ends, the benefits are greater than the risk.
It is the temptation that may make balance transfer cards a non-viable resource for eliminating debt. Cardholders that consolidate their balances to one card only have one payment to make each month. They may become inclined to either use their now balance-free card to make more purchases or allocate the ‘extra’ money they have after consolidating payments for other things besides debt elimination. The vicious cycle of spending more than you have is often a big factor for consumer continually in debt. Adding a new credit card to the mix may be a dangerous financial move.
How to Make It Work
If you still have good credit and can get approval for a balance transfer credit card, you must first make some considerations about your finances and spending habits before signing up.
Have a Plan
Say you consolidate $3000 worth of balances from several other credit cards. Your low interest rate period of the balance transfer card is 12 months. You have to calculate the outstanding balance divided by 12 months to figure out how much you need to pay each month to be debt free within the year. In this case, you would need to pay at least $250 a month, every month for a year to zero out the balance. You also have to factor in the interest charges on the card each month so add a few more dollars to your monthly payment to account for that. Even if your minimum payment each month is only $75, you need to commit to allocating a full $250-$275 a month to eliminate the debt in time. Resist the temptation to only pay the minimum and spend the rest elsewhere.
Compare Offers
If your credit is good and you have the option of several cards, make sure you check the terms and conditions of each of the balance transfers to find the right one for you. You may be tempted to sign up for the first offer you get, but it is in your best interest to find the card that best suits your lifestyle.
You may be approved for a balance transfer credit card but be cautious of your limitations. You may have $5000 in existing credit card balances but only a $2500 limit. Work out the numbers to see if it is worth making transfers if you can only deal with a portion of your total balance owed.
Stop Spending
Once you have zeroed out your other credit card balances, stop spending beyond your means. A clean slate may be too strong a temptation so consider taking the cards out of your wallet and only use one for emergency purposes – at least until the balance transfer card is also zeroed out.
Jeff Weber writes about saving money and reducing credit card debt with balance transfers at SmartBalanceTransfers.com, a website designed to educate consumers about 0% APR balance transfer credit cards.
Stop spending beyond your means is the best tip of them all. So many people transfer their balance to a new card, just to start their spending cycle all over again.