I’ve also written about how personal loans aren’t always bad debt. Just because something can be used irresponsibly, it doesn’t mean that they should be avoided at all costs. Instead you should learn how to properly use it to your advantage.
So when other financial writers are proclaiming that credit cards are the spawn of Satan, I just don’t buy it. When they make such absurd claims, they are just letting people deny any responsibility for their mistakes with credit cards.
When we think of potential benefits of credit cards, the most obvious ones are the convenience and the rewards you can earn on purchases. The other big benefit that we should keep in mind is balance transfer options.
How Does a Credit Card Balance Transfer Work
When you first sign up for a new credit card, many cards these days have an offer to transfer a balance to your new credit card. You may ask: why would anyone want to transfer an existing debt to some high interest credit card?
The key is that they offer extremely low rates on these balance transfers. The best credit cards will offer you a 0% interest rate for up to 12-15 months. I’m sure a lot of you wouldn’t mind saving on interest for that period.
You simply get several checks that you can put towards whatever kind of debt you have. Then when you use any of those checks, the balance shows up on your credit card with their promotional interest rate.
With your existing credit cards you are often given similar offers that you can take advantage of at any time. The process works the exact same way.
So What’s The Catch?
Of course with credit cards, it isn’t all about saving consumers money. There is a catch that ensures the credit card companies make money off the deal. In this case there are actually a few catches.
The first catch is that instead of paying interest on the balance you are instead paying a balance transfer fee. This is normally calculated as a percentage of how much money you are transferring. Fortunately this fee is substantially lower than the interest you would have had to pay on your existing loan.
The bigger catch is that if that balance is still on your credit card once the promotional period expires, you will suddenly be paying high interest rates on that balance. Unless your previous debt was also on a credit card, that interest rate will be much higher than you were previously paying.
Also you have to be aware that you are usually required to still a pay a certain amount of that balance down each month. If you’re late on a payment, your balance transfer promotion is voided and you start getting charged higher interest. Really, you should keep making at least the full payments you were making previously. Suddenly paying only the bare minimum required by the credit card company could stall your debt payoff progress.
How Do We Use Credit Card Balance Transfers To Our Advantage?
The first step is to do the math to ensure that the balance transfer fee is indeed less than the interest rate you are currently being charged. In almost all cases it will be lower, but it is best to double check.
Next you should have a plan of how you will clear the balance before the promotional period expires. If the balance is low, you might be able to plan to pay it off completely in that time. Or you may need to arrange for somewhere else to transfer that balance once the promotion is over. That might be a line of credit with your bank or possibly a personal loan.
Some people even transfer it to another promotional offer with a different credit card, but you don’t want to get caught up signing up for many different credit cards. Getting too many credit cards can be a risky temptation for people and it also can be detrimental to your credit rating. I have heard of people transferring a balance from one credit card to another for years and saving huge amounts of interest, but that won’t work for everyone. I wouldn’t pursue that route unless I was absolutely certain it was the best route.
When you do take on a balance transfer offer, remember to mark off the promotion expiry date on your calendar or with some other reminder. That expiry date can sneak up on you and you might not remember until you see a big interest charge on your statement.
Personally I’ve used balance transfers to save on interest fees with both of my car loans. Once the balance was a low enough amount that I was comfortable transferring it to a credit card, I applied for the best balance transfer credit card I could qualify for. During the promotional period I paid off most of the balance and then moved the remaining balance over to my line of credit. I don’t know the exact amount I saved on interest each time I used this strategy, but I would definitely do it again the next time I need to take out a personal loan.
This post was written with the help of Tomorrow Finance. Check out their website for loan options in Australia.