What is a Balance Transfer?
At some point in your life, you might have encountered the term balance transfer. But what does it really mean? And what can it do for you? A balance transfer works in a very simple way, it is when you transfer money from one account to another. It is sometimes called a credit card balance transfer, which is considered as an act of transferring your own credit card debt to a brand new credit card for a much cheaper interest rate. This is often performed so a credit card can be paid off.
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A balance transfer is a process of transferring your credit card debt from your present lender to another one. This is carried out to enhance the interest rate or offer you a 0% interest-free period that will enable you to settle your debt within a specific time period. If you don’t settle your credit card within this given time period, you may face late charges and high-interest rates. Make sure you won’t fall under this cycle of transferring the debt to new credit cards. This is because balance transfers are usually logged on your credit report as a negative financial activity, which can damage your credit score.
Hidden Costs To Watch Out For in Balance Transfer
When selecting a new credit card that you can use for a balance transfer, there are hidden charges that you should watch out for, including:
- Credit Card Interest Rate – though you might think that you are offered the best deal, once the interest-free period is an offer, credit card interest costs will knock you back to reality. And they can cost as much as 20%!
- Transfer Fees – before you sign anything, make sure you check for transfer fees. They can reach as much as 3% of the total amount being transferred, making the repayment procedure even difficult.
- Annual Fee – read the fine print and scan for an annual fee. Even if balance transfers advertise 0% interest rate for a specified time, this doesn’t mean that you don’t have to pay for anything. There are even times that the annual fee is more expensive than usual.
Buy Interest Rate
When you have your new balance transfer interest rate card, don’t use it to make new purchases. This is often a trap that many people fall for and as a result, the banks make more money out of it. The lenders or banks can charge as much as 24.99% of interest rate, so better be safe than sorry and avoid those unnecessary purchases.
Credit Card Revert Rate
Another trap that you don’t want to be part of is the credit card revert rate. It is the amount you are charged when your initial interest-free period is over and you still haven’t paid off all your balance transfer. Revert rates can increase from 7.9% to 21.99%. This should encourage you to pay your balance transfer in full.
What You Should Know About Balance Transfers
Balance transfers have their pros and cons and before you decide to use it for your advantage, here are a few things you should know about it.
- It Doesn’t Happen Overnight
A balance transfer can take up to 2-4 weeks. Once that’s done, keep your old card in a safe place and away from your reach, so you won’t be drawn in to utilize it. If you insist on using it within this period, you may face additional fees on top of your present debt.
- It Has Transfer Limit
Basically, the limit of your latest credit card needs to be higher than your transfer balance. Every lender or bank has different terms and conditions, so make sure you check it out.
- It Is Not for Everyone
Take note that everyone goes through different financial circumstances. It all depends on your individual financial situation whether or not a balance transfer is suitable for your present situation. Always remember that balance transfers are not for everyone and they don’t fit every financial circumstance that you encounter. It is still best to seek professional financial advice before you decide to apply for bank transfer.
- It Is Not the Only Financial Option
Balance transfers aren’t the only financial solution that you can resort to. In fact, if you want to settle your credit card debt or any other debt, a consolidation loan could be a great option.
A consolidation loan is a personal loan that merges all your outstanding debts. Based on its name, it simply consolidates every debt that you have. This means that you will make one big repayment, instead of doing multiple ones. A consolidation loan may also have a cheaper and more consistent interest rate on all your outstanding payday loans. To simply put it, once you consolidate all your debts, they will be repaid using a single regular repayment. This means less stress, more budget control, and potential savings on additional fees and interest rates.
Things to Consider Before Applying for Consolidation Loan
Just like any financial decision, you should first ask for professional financial advice before you apply for a debt consolidation loan. After that, consider these things to determine if debt consolidation is right for you.
- Affordability – when you apply for a payday loan in Australia, you should consider if it is more affordable to pay off compared to your outstanding debts. You should also find out if you are financially capable to keep up with the repayments of a consolidation loan.
- Early Repayment Costs – there are consolidation loans that charge certain fees if you want to settle your loan earlier. It is vital that you consider the early pay off costs before you apply for a consolidation loan. In other words, if you are certain that you want to settle your loan earlier, see to it that despite these extra charges, a debt consolidation is still a viable option for you.
- Legitimacy – above anything else, make sure you get your debt consolidation loan from a reputable, licensed, and legitimate lending company.