If you are an ordinary citizen, we are confident that you receive at least 2 letters per week offering you a 0% balance transfer for a certain number of months. We all wonder whether it would be a good choice or if there would be a catch somewhere. Well, it can be good and bad depending on how you deal with it.
So what is a balance transfer?A balance transfer is the transfer of balance(whole/part) in one account to another account which is usually of another financial institution. The term is most commonly used when describing a credit card balance transfer. It comes with a balance transfer fee of usually 3-5% and as an incentive, the new institution will offer you a 0% interest rate for 12-24 months depending on your debt-to-income ratio, credit score, and a variety of other factors. These institutions may or may not charge an annual fee, which we highly recommend to not opt for.
Pros of a Balance Transfer:
1) Save money : By reducing high interest rates, interest accrued on the balance every month can be saved and can be applied to other debt.
2) Ability to negotiate the terms : New institutions in their attempt to get your business will be open to negotiations of credit terms like grace period and late fees charges.
3) Consolidation of credit card debt : This is beneficial if you have multiple small credit card balances with high interest rates. This is usually perfect for store credit cards.
4) Potential credit score increase : The simple transfer of debt will not cause the increase. However, lower utilization of available debt may help increase your credit score.
Cons of a Balance Transfer:
1) Balance transfer fees : All transfers come with at least 3% of fees which will be added to your balance.
2) 0% rate is short-lived : The 0% rate is not for ever and after the stipulated period it goes up to 20-25%. Hence the transferred amount must be paid off on time.
3) Add to your debt : If you are not disciplined, chances are you will add to your debt due to the available credit.
4) Potential credit score decrease : Though occasional balance transfers will help, too many will backfire as it increases the number of hard inquiries and frequent opening of new credit.
To summarize, just like any other financial tool, balance transferring has its own pros and cons. If you exercise it correctly, you would stand to benefit from it. We recommend the services of a financial coach to analyze your situation and provide you with the right recommendations.