How do transfers on credit cards work?

credit card transfersTransfers on credit cards work by moving the debt you owe on one or several credit cards to a single, consolidated debt on a single credit card. The practice had gained popularity once credit card users figured out some of the benefits they could reap from such a move.

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While balance transfer credit cards can come with money-saving benefits, they are not necessarily a magic key that erases all your money-owing woes. They can also come with several caveats that may land you more deeply in debt if you are not careful.

What are some benefits of balance transfer credit cards?

One of the major benefits of balance transfer credit cards are their potential to save you major amounts of money, or even just a little cash. This benefit is fully employed when you move a debt to a low-interest credit card, which automatically reduces the debt owed by reducing the interest you’re paying on it.

Finding a zero interest rate credit card is a prime way to go about this since the interest rate disappears altogether.

The U.S. Small Business Administration (SBA)  notes a zero percent interest balance transfer credit card can be especially beneficial for small businesses, although individuals can save just as much money. The SBA offers the example of how moving a $5,000 debt from a card with a 17% interest rate to a 0% interest rate credit card can save $862 in interest over a 15-month period.

What are some detriments of balance transfer credit cards?

transfers on credit cardsAlthough moving a debt from a high-interest credit card to a low-interest or zero percent interest credit card may seem like a no brainer, it does come with a few things to watch out for. Even if the balance transfer credit card does not have any interest charged, it may still charge a balance transfer fee, the California Department of Consumer Affairs explains.

The balance transfer fee can be a set amount or a percentage of the amount of debt you are transferring to the credit card. In some cases, keeping your balance due on the existing, higher-interest credit card can actually work out cheaper than transferring a balance to a credit card that charges a substantial balance transfer fee. Look for a balance transfer credit card that waives the balance transfer fee or offers one that will at least not cost you more money than you would already owe.

Another thing to look for is how long the rates of a low-interest credit card or zero percent interest rate balance transfer credit card remain in effect. Balance transfer credit cards can offer phenomenally low interest rates as part of an introductory package to prompt you to switch to their credit cards. But credit card introductory APR rates do not last forever and the balance transfer credit card’s usual rates may actually end up higher than the rates from the credit card you left. Read the fine print carefully to determine how the credit card company determines its annual percentage rate and get an idea of what that APR will be.

What else should I know about balance transfer credit cards?

Just like with any other type of credit card, balance transfer credit cards can impose a number of fees and penalties that are spelled out in the fine print. These may include an annual membership fee for simply holding the credit card, fees for exceeding your credit limit or asking for a higher credit limit, according to the Federal Reserve. You may also encounter an application fee for filling out an application, a set-up fee for establishing an account and late credit card payment fees.

Also, be wary of special services that could also incur fees. These may include coverage that suspends or cancels your debt if you face hardships such as unemployment or are injured and unable to work. Insurance can also be available to cover your debt in the event of unemployment, disability, or death.

Applying for balance transfer credit cards should also be done selectively and with utmost care.

Applying for many credit cards at one time can negatively reflect on your credit score. Your credit score can also suffer if you hop from credit card to credit card in the hopes of retaining a perpetually low interest rate by taking advantage of low or 0% introductory rates and then bailing out when the introductory period expires.

The wisest way to keep your credit scores in check while reducing your debt is to research the available balance transfer credit cards and chose one that works best for you. Keep an eye on interest rates, penalties, and fees, especially the one charged for transferring your balance due.

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