When we talk about managing our debts better, moaning about interest rates and what our options are, low interest rates on credit card balance transfers often come up in conversation. But what exactly do they mean, what do you need to do to benefit most out of it, and what should you be on the lookout for as to not get into more debt than you started with?
The importance of interest rates on credit cards balance transfers
Before we start examining what interest rates on credit card balance transfers actually signify to the average consumer, let us first examine the concepts which make up the parts of this matter:
- Interest rates,
- Credit card balance, and
- Balance transfers.
What exactly do they mean and how does it affect you?
The Economic Glossary defines interest rate as the yearly price charged by a lender, in this case the bank or loan company, to a borrower, you holding the credit card or loan, in order for you to obtain a loan. It is usually a percentage of the total amount lent to you. There are said to be a hundred if not thousands of rates and they differ because of the duration or perceived risk of the loan.
Credit card balance
The definition of a credit card balance is simple, it is the amount you must pay yo reimburse the bank for the purchases that you charged to your credit card.
According to LaToya Irby, an About.com Guide, a balance transfer is the process of moving credit card debt from one credit card to another. Bear in mind that balance transfers are dependent on a fee that’s a percentage of the amount you’re transferring form one card to the other. More often than not, the interest rates on credit card balance transfers start off with a very low rate, some even as low as 0/%.
Now that we have the basics down, let’s look at the concept as a whole and this will effect you as a consumer.
Why should I consider a credit card balance transfer?
A credit card balance transfer offers you the opportunity to save quite a bit of money. They are a very helpful tool to consolidate your debt. The interest rate is usually lower on your new credit card, with some banks offering up to no interest rates on credit card balance transfers for a set amount of months. Bear in mind that you will have to pay a transaction fee for the balance transfer. Many people are transferring their balance from a high interest card to a lower interest card in an effort to save money and better control their assets and liabilities. As all your debt is now in one place, it makes it easier to manage. If you are looking for low interest rates on credit card balance transfers, it will be worth considering if you want to pay of a loan fast or plan on shifting your loans. Elizabeth Brokamp wrote on Fool.com that most American families carry debt on average ten thousand dollars or more, paying a thousand dollars in debt. She also says that your initial period may be anything between six and twelve months that could be completely interest free when you start looking into interest rates on credit card balance transfers. Look around though, as CreditCardAssist.com offers deals up to fifteen months. On average your American family pays interest rates that have double digits.
Why should I care about the interest rates on credit card balance transfers?
You should consider a balance transfer if your current credit card balance is quite a large some that is being carried over on a monthly basis. You could potentially save quite a bit of money, as it is especially advantageous in the long run, because you will be able to see how much money you are actually saving. If you use the new card wisely, such as taking no advances and avoiding spending on the card altogether, you will reap the full benefits of the balance transfer. You will be able to pay off your debt without the additional interest charges. Always be aware of the terms and conditions of the balance transfer to your new card. On average the American family pays interest rates that have double digits. That alone should make you consider the interest rates on credit card balance transfers. Brokamp states that these offers and low introductory rates are perfect for someone who has a plan for paying of their debt and is able to do it in a grace period.
What are the pitfalls to interest rates on credit card balance transfers?
If you are late even just once with a payment, the company that lent you the money may apply their normal interest rates to your account effective immediately, and you may be liable for a penalty fee. Also think about benefits the lender may offer you such as extremely low rates, loyalty points, interest-free periods etc. These may encourage you to return to your bad spending habits, putting you worse off than you were before. If you have a lot of debt, your first priority should always be to pay it off in full. You need to be willing to stop spending, or you could make your financial situation worse. You may also have higher transaction and transfer fees which could be why they have such low interest rates on credit card balance transfers initially. Also watch out for a higher interest rate after the introductory offer expires. Remember that even though they may offer you a very low rate, there is no guarantee that you will actually receive it, although this may depend on your credit record. You may also not be eligible for a balance transfer at all if you have a bad credit record. Remember that these companies are not offering you a low interest rate on credit card balance transfers because deep down they are kindhearted people. They are taking a gamble and hoping that you will not be able to pay off your debt in the given time so they can slam you with an even higher interest rate. The lender may also not give you free reign on which debt you can pay off. It is also not wise to take advantage of the lower interest rates on credit card balance transfers to make an investment, because if the investment doesn’t produce the expected return, you may not have the sufficient funds to pay off your debt at all. Remember that this is a risky strategy to embark on.
Factors to consider on interest rates on credit card balance transfers
According to Imprest.net, there are a number of variables that you need to take into consideration, and they list them as follows:
- The period of time your introduction card rate is active.
- If there are any monthly or annual fees present.
- If the intro rate is active only for the first transfer or if it can be applied to other balance transfers that are performed during the introductory time.
- If the rate on your balance transfer cards is applied to purchases.
- What is the rate that will be applied to your card when the introductory period is over.
- What are the transaction fees, if any.
Other factors that the Small Business Loan Central states as important are:
- The annual percentage rate
- The company’s credit rating
- The late and annual fee
- The summary of the costs associated with the card, also known as the Schumer box.
Staying organized is the biggest tool you have working to your advantage. Knowing when you are due with payments, and making them on time will keep your interest rates on credit card balance transfers low and avoid penalty fees. It will also help you to make the most of your very low or no interest period to consolidate a big part of your current debt. If you are not able to pay off your debt before that period expires, it may be worth starting to look around for another balance transfer option six to eight week in advance to the end of your introductory rate. Do not rely on your company to remind you that your period is coming to an end, so it is up to you to investigate other interest rates on credit card balance transfers. Do not do this too often though, as credit card suppliers are still in the business of making money and if you have a record of cutting ties and jumping ship, you may not get another offer and you will be stuck on the sinking ship that is your debt with the possibility of higher interest rates than you ever imagined.
All in all, it would appear that if you are self-disciplined, have read the fine print, shopped around is willing to take charge of your finances and your spending, looking into a low or no balance transfer could be a wise and valid investment in your debt. Be smart, stay informed and do what you promise yourself you would do. This is the only way to manage your finances, your debt and the interest rates on credit card balance transfers.