Consolidating debts with a 0% balance transfer credit card is one of the effective ways that consumers can deal with multiple credit problems. It is mainly used to combine credit card balances so the consumer can benefit from a more simple payment plan. By combining the other debts under one card, the consumer will find it easier to monitor and stick to their monthly payments.
This debt solution involves getting a new credit card that offers a 0% interest on credit card balances that will be transferred to them. This introductory rate typically runs for a couple of months to more than a year. During this time, the consumer pays their debts and any balance carried over to the next month will not accrue finance charges. Any amount paid will only be credited to the principal balance.
According to a study done by CardHub.com last February 2013, a balance transfer program can help the consumer save $1,000 worth of fees and other charges. At least, this is true for debts that average at $6,700. And if the consumer is able to manage their finances well, they can even get out of debt within the introductory promo period of the new card. The 0% interest can be a powerful encouragement to save your money. Instead of having a portion of it go to the interest, it will all go to the debt. If the consumer creates a payment plan around that promo period, they can get out of debt a lot faster.
5 things you have to accomplish before transferring your balance
But as great as balance transfer may be, it is important for you to approach it the right way. While there are many pros and cons of using balance transfers, you want to make sure that you will minimize, if not eliminate, the disadvantages.
To do that, you should do these 5 tasks.
Know the terms of the balance transfer card carefully. It is always important for you to read the fine prints of the card very well. You do not want to be left unaware of certain details about the promo. It will be difficult to take advantage of the benefits of this card if you do not know the terms of the promo. Different credit card companies have various offers. In the same study done by Card Hub, they revealed how Chase will not accept transfers coming from store cards. Or that 63% of balance transfer card issuers can accept the transfer of most type of consumer debts (student loans, auto loans, mortgages, etc). Even medical bills and business loans can also be transferred. You want to be aware of all of these to make sure that you can choose the right card for your debt situation.
Prepare the balance transfer fee that you have to pay for. At the beginning of the promo, you have to pay a fee that covers the transferring of the amount to the new card. This is usually a percentage of the amount to be transferred. The usual rate is 3% but some issuers impose a 5% fee. That means if you want to transfer $10,000 worth of debts, you need to pay $300 to complete the transfer process.
Find out what the 0% can cover. In some cases, issuers will only cover the transferred balance. In some cases, the 0% arrangement can also extend to new purchases. If you are not careful, you could make a mistake and end up making your debt situation a lot worse. You might think that the new purchases are part of the 0% rate when it really is not.
Inquire about the changes that the rates will be going through. According to a report done by CreditCards.com, there are some issuers of balance transfer cards that will only impose 0% for 60 days and then raise that rate to 3%. After sometime, it will go up to 4% and then to 5%. Make sure you are aware of these changes so you can prepare for them. By knowing these changes you can anticipate when they will happen and thus increase your payments to minimize the effects of the interest hike.
Read through reviews about the card and the issuer. It is important for you to do a background check on the issuer regardless of how prominent they may be in the industry. Some banks are better than the other depending on the specific needs of the client. Make sure you take time to find your perfect match to maximize the benefit of the balance transfer program.
All of these tasks should help you make a smart decision about whether or not, this is the right debt relief option for you. More than that, this option will help you choose the specific card that can satisfy the needs of your credit situation.
Important reminders when shifting debts into a new card
When you have firmly decided on pursuing balance transfer to get yourself out of debt, make sure that you read through a couple of these reminders.
Put your payment plan on a budget. The goal of balance transfer is not just to consolidate your debts but to also pay off your debt within the 0% promo period. You should align your payment plan with your household budget to ensure that you can put as much monthly contribution as you can. Cut back on things that you do not need. In fact, you may want to consider adapting a frugal budget to help you minimize your expenses to make more room for debt payments.
Keep yourself from using the credit card for new purchases. If it is not a matter of life and death, you may want to refrain from using your credit card for other purchases. This is to keep your balance down as you pay off your current debt.
Be strict about your payment schedule. Most balance transfer terms state that any late payment will result in the termination of the 0% interest promo. Try not to be late so that you can maximize the lack of interest on your payments within the promo period.
Consciously monitor the promo ending. Never forget when the promo will end so you are made aware of when the high interest rates will kick in. Before that time comes, make sure that you put as much money into the account as you possibly can.
If there are debts that you cannot put into the balance transfer card, ensure that you have created a plan for them too. Try not to focus too much on this program if you know that there are debts that also need your attention.
2 other options to consolidate if transferring your debt is not possible
In case the balance transfer will not work for you, try to use any of the two debt consolidation options.
Debt consolidation loans
This option can be used on practically any type of debt that you owe. In fact, FinAid.org revealed that borrowers who are burdened with student debt can reduce their monthly payment through this debt relief program. This is done by increasing the payment period of the original loan. What happens is the consumer will borrow a low interest loan that they will use to pay off the multiple debts that they owe. That way, they are left with one payment under one lender.
The other option is known as debt management. This debt relief option will involve a credit counselor who will help them put together a debt management plan. This plan will hold the longer payment term of the consumer so they only have to make a smaller monthly contribution. The credit counselor will also try to negotiate for a lower interest on the debt. The consumer will then make one payment toward the credit counselor who will distribute the amount towards the other creditors included in the debt management program.