Credit cards are a booming business, and credit card companies make most of their money from finance charges. With annual percentage rates on many cards as high as 16 percent or even 22 percent, it’s very difficult to pay down the principal balance on a credit card, because of constant interest charges being added to the total balance.
If you consistently carry a high balance on your credit card, you could be compounding thousands of dollars in interest every year on your account. Balance transfers can be a way to approach credit card debt that’s growing beyond your control.
What are Balance Transfers?
Balance transfers are an option that allows cardholders to move one credit card’s balance onto another credit card. Taking on a new card may not seem like a good idea if you are already struggling with a heavy burden of debt, but it can be helpful if you are prepared to aggressively pay down the old debt without taking on new purchases.
In an effort to bring in business, many credit card companies offer credit card deals that include the ability to transfer a balance. Some introductory interest rates are as low as zero percent for six months to a year, and for card users with excellent credit, up to two years of no interest charges.
Transferring a balance can be an excellent way to reduce debt, leaving you free to pay down a balance without incurring high interest charges that counter your efforts.
Risks of Credit Card Balance Transfers
Before filling out the next credit card balance transfer offer you receive, there are a few key points to keep in mind when acting on this strategy.
Conceivably, a consumer could continue to do balance transfers at zero-percent introductory rates indefinitely, opening new accounts when the old account’s promotional grace period expires. If you plan to do that, however, it’s important to remember that too many credit card applications can make you look like a high-risk customer in the eyes of creditors. Additionally, your credit score may suffer from such a move causing those 0% introductory APR deals to come to an abrupt halt.
You should also be sure you know what you are getting into. Some cards offer introductory rates only for the balance being transferred, not for additional purchases made on the card. In this scenario, your credit card company may apply payments to the lowest rate transaction first, and your new purchases will remain on the card, collecting interest at the higher rate. Always be mindful of the fine print in the promotional card’s terms and conditions before agreeing to any new credit card deals.
Used properly, balance transfers can be an important component of your debt-reduction strategy.