When you’ve finally decided to get down on it and get rid of your debts, one of the first tips you’ll find anywhere on how to tackle the problem is to align your debts by interest rate with the most high first, then make minimum payments on all debts while putting a large extra payment on the highest interest debt at the start of the line. When that debt is gone, you move on, allocating a big extra payment each month to the debt that’s now at the front of the line, and so on until the line is empty.
Of course, one way to make this range of debt a little easier to manage is to look for ways to lower the interest rates on these debts before aligning them. You can do things like consolidate your student loans or refinance your home, but another option that people often use is to sign up for a new credit card with a 0% balance transfer offer.
How do balance transfer offers work?
When you sign up for a card with a 0% balance transfer offer, you can agree to immediately put a balance on that new card. The credit card issuer will then send a payment of that amount directly to the business behind your old credit card, usually by paying it back or paying off a large portion.
So suppose you have $ 1,000 on a credit card that charges 29.9% interest. You sign up for a new card with a 0% balance transfer offer and accept this offer. Your new card starts with a balance of $ 1,000, then that company sends a payment of $ 1,000 to your old card, for a fee.
The new balance on your new card is special – it is almost treated as a separate balance on the same card because it has some special rules applied to it.
First of all, this transferred balance will have an interest rate of 0% which will be applied to it for a certain number of months, generally 12 or 18 depending on the offer. During this time, no interest will be applied to your account.
There is however a catch: the business will always calculate the interest that would have accrued on this amount, and this is often a higher rate than normal. They don’t apply it to your account again, but they track it.
Why would they do this? For most 0% balance transfer offers, if you reach the end of the period where the 0% offer applies and you have not fully reimbursed it, they will apply all of this calculated interest to your account.
So let’s take a look at this example of $ 1,000 again. Let’s say the balance transfer offer lasted 12 months and the “hidden” rate was 36.9% APY. At the end of this year, if you have not paid off your entire balance of $ 1,000, $ 369 will be added to your credit card bill. Even if you only have $ 50 left to pay, you will still owe any interest that would have accrued.
You will need to read the fine print to find the “hidden” interest rate on your balance transfer. They will obviously broadcast the 0% balance transfer rate and hide the much higher rate you face if you don’t pay the transfer on time. Look for it – it’s important.
So why do you want a 0% balance transfer offer? This is because, if you pay before the offer expires, you will save a lot of money.
If you left that $ 1,000 on your old card at 29.9% interest and intended to repay it over the course of a year with 12 equal payments, you would have to pay $ 97 per month, for a total of 1,164 $, to pay it. .
If you transfer this $ 1,000 to a 0% balance transfer offer and pay it over the course of a year with equal payments, you will only have to pay $ 84 per month, for a total of $ 1,000. This saves you $ 164 if you make all the payments.
Of course, these figures refer to a balance of $ 1,000. If you transfer a large balance, everything multiplies! In the example above, transferring a balance of $ 5,000 would actually save you $ 820.
Of course, if you don’t pay it completely, you actually have to more interest in this example only if you had just left it alone, and this is true for many balance transfer offers.
So, the key to getting the most out of a balance transfer offer is to pay for everything before the balance transfer offer ends. If you do this, you will save a lot. Otherwise, it may cost you a little.
Let’s talk about some strategies for doing this, while avoiding some common pitfalls.
Don’t move the debt with the 0% balance transfer offer in your list; rather classify according to the “penalty” rate.
When you run a 0% balance transfer offer, it can be tempting to move that debt to the back of the pile. After all, it’s 0% interest, right?
Do not do that. Instead of, File the card with the 0% balance transfer offer based on the interest rate you would be charged on the transfer if you let it expire without paying it back. This is generally different – and higher – than the primary interest rate on the credit card.
Why rank it so high if it is 0%? It’s simple – if you don’t get it back at the end of this transfer, it will be as if this balance still has this higher interest rate.
I really like to see things differently. I think the 0% balance transfer offers are a good “bonus” if I repay this card quickly. If I transferred more than $ 1,000, as in the example above, I think it actually accrued the $ 369 over the course of a year, but if I pay it, the credit card company covers the $ 369 for me. If I don’t do it, then they won’t cover it for me.
In other words, I do not consider it as an interest rate of 0%, but as an interest rate of 36.9% with a really sweet bonus if I pay it quickly, this bonus being that they will cover all the accumulated interest.
This is how I recommend you treat it. Use the special interest rate for the balance transfer that would be charged if you didn’t pay it on time to prioritize your balance transfer among all your debts. This will likely move it to the top of the stack, but it’s actually where it should be. If you pay it on time, having it at the top of the pile will have saved you a lot of money compared to putting it at the bottom and do not pay it on time.
Do not use the balance transfer card for anything unless you are extremely confident that you will have a $ 0 balance on that card very soon.
Rather than using your new card for purchases, wait a moment and make sure you paid the balance transfer in full before using it for purchases. Instead of, keep using your old card (if you’re still using a credit card), which should now be without balance (or at least much lower).
Why do this? It’s simple: if you use the new card, you add an additional balance to the card. When you submit a payment on this card, most credit card companies do not apply this payment to the balance transfer amount. They will usually pay the new fees in full before tackling the balance transfer amount.
Thus, the only way to reduce this amount to $ 0 is to reduce the total balance of this card to $ 0. Adding additional fees to the card makes this more difficult, and if you fail, all accrued interest from the balance transfer part will appear on the card.
(Note that I assume that the old card you have has an interest rate lower than the “hidden” interest rate of the balance transfer to your new card.)
The best solution, of course, is to switch to using your debit card for most card purchases. In this way, you avoid charging a credit card and you are forced to keep your purchases in hand because of the limits of your checking account.
Try to repay it before the offer expires, preferably with a few months to spare.
Let’s be clear: If you do not think you can repay your balance transfer in full well before the date on which it expires, you should not make the balance transfer.
In fact, you should be able to do it. You must aim to reimburse the full balance transfer and reduce the total balance of this card to $ 0 well before the end of the balance transfer offer.
Why is it so important? If you have a plan that brings things back with a little leeway, everything will be fine if some unexpected events happen along the way. Maybe your car breaks down in the middle of the repayment period and you can’t make a big payment a month. Having leeway in your plan makes this tolerable.
This does not mean that you should slow down at the end. Pay it off before the balance transfer period ends 0%, then go to the next debt. That way you can be sure it paid off.
There is another reason to pay early: it gives you time to deal with things that could go wrong at the last minute, which I will discuss below.
Make absolutely sure that your last payment has been made, with a lot of time to spare.
Look at a 0% balance transfer offer in the eyes of the credit card company. If you pay everything on time, they don’t make money by offering you this offer – in fact, it costs them money. Their best result is that you do not do get it paid on time – you don’t cross your t’s and you don’t parse your i’s and they can slap all of that extra interest straight into your account.
This is why you want to check and recheck and recheck that after making the last payment on this balance transfer debt, everything is reimbursed in full.
You want to make sure the balance is $ 0. You want to make sure you have submitted the correct amount. You want to make sure it was submitted on time. You want to make sure there are no additional charges on this account.
You also want to give yourself enough time to fix these things if they appear. This is another reason why it is a good idea to get it paid a month or two before the balance transfer offer ends. That way, if something goes wrong, you have enough time to fix things before the time is up.
So, is a 0% balance transfer really worth it?
It is true, but only if certain things are true.
A, you must have the ability to repay this balance transfer in full well in advance of the 0% interest rate offer deadline. If it is even remotely in question, then you should not accept the offer.
Of them, you must be committed to a consistent plan to reimburse this balance transfer. Knowing that you can not enough. You must have a plan to do so. For example, if the balance transfer lasts one year, you should aim to make 10 equal payments, each equal to 10% of the balance transfer, At least. Ideally, you make payments even larger than that. So in the example above, if you transfer $ 1,000 and the offer ends in a year, aim to make 10 payments of $ 100 over each of the next 10 months. At least and try to do even more if you can.
Three, you have to be a stickler for the details at the end. You must be ready to connect to the account before the end of the offer and verify that the balance is $ 0 and that everything is refunded. Don’t just rely on the “minimum payment” on your statement. Check and make sure your current balance is $ 0, and do it with enough time to fix it before the clock runs out. This is important, otherwise you will be beaten.
I also strongly suggest don’t use the new card for anything until you have reached a balance of $ 0 and it has been there for a while, just to make sure there are no “surprises”. Instead, if you wish to continue using a card, use your debit card and simply rely on the contents of your checking account or continue using your old credit card.
If you follow these steps, you will find that a 0% balance transfer offer can save you a lot of money.
What should you do if a 0% balance transfer offer does not suit you?
If you have considered the above factors and decided that a 0% balance transfer offer is not right for you, what should you do?
First of all, assess whether you can switch to using your debit card and your money only for future purchases. If you are in a situation where you really want to get rid of your debts, you absolutely must be able to live without your credit card. You can use your debit card and money for personal purchases and your debit card for online purchases.
If you can manage things without this credit card, call the issuer of your old credit card and negotiate your rate. You will be most successful with this if you regularly carry a balance but not one that very often pushes your credit limit while tracking payments (not just on this card, but with all of your bills). In the eyes of a credit card company, that makes a good customer that they want to keep, so they’ll be ready to work with you a bit.
If you rarely carry a balance, often push your credit limit and are always late in payments, the credit card issuer will not consider you a good customer and will not be interested in lowering your rate. In fact, they may simply cancel the card. If that sounds like you, don’t bother calling them.
If you think you are a good candidate for a rate cut, call your credit card company and simply request a rate cut. Tell them the truth – you are trying to improve your financial situation and you are considering transferring 0% balance to another card to help you, but you want to see if they will improve your interest rate first. If you are in good standing, they will likely lower your rate somewhat, which will help you considerably.
In all cases, stick to your debt repayment plan. It works. Continue to make minimum payments on all your debts and make a large additional payment on the debt at the highest interest rate. Do it month after month without adding more debt to the pile and you will see great progress.
Originally posted 2020-06-06 01:17:35.