Credit cards are a booming business, and credit card companies make most of their money off of finance charges. With annual percentage rates on many cards as high as 16% or even 22%, its very difficult to pay down a credit card, because your bank is constantly charging interest and adding it to the principal. If you consistently carry a high balance on your credit card, you could be compounding thousands of dollars in interest every year on your credit card account.
If you are in a situation where you are unable to keep up with the mounting debt and compounding interest on your credit card, it may be a good time to consider a balance transfer. Taking on a new card may not seem like a good idea if you are already struggling with a burdensome debt, but it can be helpful if you are prepared to aggressively pay down the old debt without taking on new debt.
In an effort to bring in business, many credit card companies will offer great deals on balance transfers, with introductory interest rates as low as zero percent, for six months to a year. For the savvy credit card customer, transferring a balance can be an excellent way to reduce debt, leaving you free to pay down a balance without incurring high interest charges. Conceivably, a consumer could continue to do balance transfers at introductory rates indefinitely, opening new accounts when the old accounts grace period expires, and beginning a new grace period on the new card. If you plan to do that, however, its important to close the old accounts as you go and make your payments on time to avoid getting bumped back up to higher interest rates.
Used properly, a balance transfer can be an important component of your debt-reduction strategy. However, be sure you know what you are getting into. Some cards offer introductory rates only for the balance to be transferred, not for additional purchases made on the card. In that case, your credit card company may apply payments to the lowest rate transaction first, and your purchases will remain on the card, collecting interest at the higher rate. Be careful and read the fine print before agreeing to any new credit card deals.
