Balance transfers are a way of moving your debt to a different provider. This is usually done when there is an incentive such as a 0% introductory interest rate for a few months, a cheaper monthly payment or lower interest rates.
These cards allow you to move your credit card balance(debt) to them. Your credit card provider may charge you a fee for moving your balance away from them.
Typically they charge between 2% and 5% of the balance being transferred as a fee. You should ensure there will still be savings or some benefit even though you are charged a balance transfer fee by your current credit card provider.
If you are already defaulting on your credit card repayments then a balance transfer card with a 0% introductory period might just buy you the time you need to restructure your finances rather than incur more interest rate charges on your credit card debt and fall into the negative side of compounding.
In a best-case-scenario, you can pay 0 percent interest on your debt, at least for a limited time. Eliminating interest charges helps to stop the bleeding because your loan balance stops growing, and 100 percent of each repayment goes toward reducing your debt rather than paying off the interest you are about to accrue for the month.
Balance transfer offers aren’t necessarily bad for your credit score, but they can cause problems. Every time you apply for a new card, lenders look at your credit history, and those inquiries can ding up your credit scores. Having too many consumer accounts (like credit cards) open can also lower your score. If you end up using a credit card to transfer balances, be sure to use them as a debt payoff tool and not a debt increasing tool. Avoid using the card you paid off to go deeper into debt.
Debt Consolidation, an alternative?😮
Instead of using credit cards, you can consolidate debt with a personal loan, some type of secured loan, or a Peer to Peer loan. A large loan might allow you to combine several loans and get everything in one place.
Debt consolidation loans often come with a fixed rate, so they make more sense when credit card promotional periods are too short. For example, a 0-percent APR offer for three months might not be useful if you expect to take three years to pay down your debt.
Paying off your debt may not necessarily be the best option for you. You must consider the oppurtunity cost of the financial decisions you make. e.g if your savings account balance is growing at a faster rate than the debt you currently owe then on the balance of things you are earning more in interest than the interest charges being incurred from your debt. In a scenario like this does it make sense to pay off your debt? Now, thats a call you will have to make but we think not.