Credit card debt is one of the biggest sources of financial stress in today’s world. In some cases, it comes as a reminder of spending sprees that weren’t great ideas, and in other cases, it is accrued during personal emergencies.
Regardless of the reason, credit card debt signifies a hit on a person’s finances. This is particularly so when the debt is considerable, leading to high monthly payments and huge interests. In order to deal with these debts, some entities offer balance transfer credit cards. These are new credit cards that come with special conditions allowing you to use them to pay off other cards.
Why do people use them?
Balance transfer credit cards aren’t quite the same as taking water from a glass and pouring it into another. The draw with these cards is that they come with benefits that people with large credit card debts are often attracted to. These benefits usually come in the form of lower interest rates, no interests charged on balance transfers, or a period of no interests. Regardless, the benefits are meant to help people pay off their credit card debt.
Eliminating the interest rates, even temporarily, allow debtors a breather. When interest rates are eliminated, every cent used for that purpose becomes a saving. When paying straight from your original credit card, at a 12-15% interest rate, a decent chunk, if not most of your monthly payments go towards interest charges instead of the original debt. Interest-free credit cards eliminate that.
Do I go interest-free indefinitely?
This depends, although nothing lasts forever. In most cases, the benefits of balance transfer credit cards are temporary or only applies to the balance transfer. That is, you might have a card where your initial balance transfer has 0% interests, but any additional purchases made with it will accrue additional charges. In fact, when applying for these alternate cards one should be aware of the card’s non-promotional interest rate, as it might be higher than that of the original card.
Other cards offer zero fees for all purchases – for a limited time. These cards can either start charging interest on purchases made after a cutoff date or start charging interests on all credit card balance after the cutoff date. If you’re using a card with a timed promotion, it’s a good idea to make sure exactly how the promotion works, and which charge would be covered by it.
Alright. Where do I sign up?
Wait, before signing up, something must be said: these cards aren’t available for just anyone. You don’t need to be rich to obtain one, but usually, they’re only given to people who have an excellent credit rating.
In any credit, the charges are there as a buffer to the lender and to serve as an insurance of sorts. If the debtor stops paying halfway through, the lender has already recouped a sizeable amount in interest charges, and if one debtor defaults, the fees from other debtors can help keep lenders stay afloat; With zero interest cards, this cushion doesn’t exist. So, these cards are only offered to people who have an excellent credit rating and are unlikely to default on their payments, even temporarily.
Will this solve my debt issues?
No, a balance transfer on its own won’t solve your debt troubles. In fact, if you default on your balance transfer credit card you might end up having to pay more interest charges and fees than you did before. A balance transfer is only a tool a person can use to help regain financial stability. However, if the situation that caused the debt on the first place isn’t solved, a balance transfer will only do more harm than good.
This is important because, while many people take credits under emergency, others don’t. Our current-day culture focuses on getting people to buy things they don’t always need, leading to the replication of unsustainable lifestyles. If a person is living above their means and spending more than they make or they can possibly pay, a new credit card will only make things worse. Even at zero interest rate, a new credit card implies an extra opportunity to spend money you don’t have.
In other words, you should only apply for a balance transfer credit card if you already have a plan in place to get rid of your debt. If whatever led to such debts, to begin with, continues, it might be a better idea to first deal with the problem, and then with the debt, once it is no longer growing continuously.
What should I look for in a balance transfer credit card?
For a balance transfer credit card, you should have all you want in a credit card and then some, at least for the promotional period. If anything in the terms would make you reject a regular card, you should also reject the balance transfer one. That said, a few of the things you should look for (and be wary of) are:
The lower interest rate, or zero interests
At least during the promotional period or covering the balance transfer amount. It would make little sense to move from an existing interest rate to another one, unless the new card offered low-interest rates you cannot ignore, such as 1-2%. Even then, there are cards out there offering zero interest charge on balance transfers, and those are what you should aim for.
A decent amount of time to pay
A zero-interest rate is worthless if it only lasts three months and then defaults to a 30% APR. The zero-interest-rate is always a timed offer, so inquire first how long you have before you start getting interest charged on your purchases.
Full promotional coverage
Not everyone will want this. However, if given the choice between a card with promotions only for balance transfers and a card that gives you a zero-interest rate on all purchases, the latter is clearly the better option.
As for where to find them, most balance transfer credit cards are offered by financial institutions. Bank of America specifically has several programs with these cards, including a few truly great offers. HSBC and CitiBank also have such offers for the US, while for the UK, Santander and Barclays offer these programs.
I can’t apply for these. Are there any other alternatives?
If a balance transfer credit card with no interest charges isn’t something you can obtain, then perhaps other less beneficial, but still decent steps could be taken. The main option at your disposal, in this case, would be applying for a credit card with lower charges, then transferring your balance to it. It won’t be as good as a zero-interests program but reducing your APR from 15% to perhaps 8% will still help your finances. This option should also be considered if you can’t pay off your balance during the promotional period of the zero-interest cards.
Alternately, sometimes a visit to the bank to look for help with debt payments can be helpful. Not all banks or agents will be willing to help, but sometimes, banks would rather renegotiate a debt than risk defaults. So in case of an emergency, that’s always an option to try.