Although we all come in contact with various transfer operations at some point, few of us really know what they mean and how they can impact our financial situation.
Balance transfers, for example, allow you to transfer a high-interest debt to a credit card using a lower interest rate. This process helps you pay off any debts faster as they become more affordable. Learn here about how to pick the right accounting software.
But how do balance transfers really work? What are their benefits (and disadvantages) compared to a debt consolidation loan and how can you know which is the right option for you?
Today, we’ll answer all those questions and more. First things first, though…
What is a balance transfer?
The simplest way to describe balance transfers is this: they help you move your debt from one account to another. You can do this process with a 0% introductory annual percentage rate (APR), which can last for 6-12 months until the usual interest rate is applied.
With balance transfers, you can choose your own payment due date depending on your personal income; as a plus, this option doesn’t involve any late fees either.
So far, so good – but how does this entire process work?
How do balance transfers work?
The first step of any balance transfer is to find a card offer which matches your credit score. Read the terms and conditions of the card, then call your card issuer and ask for a debt transfer to a credit card.
Within a short span of time, you’ll get a new card with the debt balance you chose to transfer. This card is often accompanied by a balance transfer fee established by your card issuer.
The same process can also be done online and it’s often easier this way.
The trick with balance transfers is to try and pay off your debts before the introductory APR expires (6-12 months). This way, you won’t have to pay any debt interest and the entire process is more affordable overall.
Interest rates & fees
If you have a good or excellent credit, you’ll get a great interest rate – but be patient! Instead of giving in to tempting advertisements and promotions, ask your card issuer for a proper evaluation. Only then will you know your financial status and your real options.
As for the fees, some banks or companies may request a fee that you must pay once the transfer balance has been made. Usually, the cost is somewhere between 3-5% of the amount of money you’re going to transfer; however, some offers also feature modest flat amounts such as $20. If you find the right offer, you might not pay any fees at all if you make the transfer balance within the first days since opening the new card.
What about the credit impact?
Although balance transfers seem like a quick solution to pay off your debts, note that they can also have a negative impact in the long run.
With every application you submit for a balance transfer card, your lenders make an inquiry into your credit. A new credit can be the equivalent of 10% of your credit score – and if you open several credit accounts simultaneously, you may actually lower your credit score by a whopping five points!
For this reason, it’s best to be cautious and only use this option when you’re absolutely certain that it’ll help you get rid of a debt easier and quickly.
Debt consolidation loans
Balance transfers are just one of your options when it comes to paying off debts. The alternative is to get a debt consolidation loan, which is basically a new loan you make to pay off the loan you already have.
There are three types of debt consolidation loans:
• Personal loans
• Secured loans
• P2P loans
Now you may be wondering why someone would get another loan just to pay an existing one. Well, debt consolidation loans can come with a smaller monthly payment or a lower interest rate – or both. Basically, this just speeds up the process of paying off your debts.
Interest rates & fees
With debt consolidation loans, things couldn’t be simpler: the higher your credit score, the lower your interest rate! Generally, though, you need a credit score of at least 580 to qualify for an advantageous interest rate.
Note that even if you do get a good interest rate, it can remain unchanged or suffer fluctuations depending on your lender. Ideally, you should find an offer with fixed rates so you can manage your income easier and avoid unpleasant surprises.
When it comes to fees, things are similar to balance transfers. Some loans require an up-front fee, while others will include the fees into the interest rate. A specialist can help you find and choose the most beneficial offer for your current financial situation.
Balance transfers vs. debt consolidation loans
Generally, both options can help you pay off your debts faster and/or easier; they may have low fees or now fees at all and each can offer a low interest rate.
With so many variables, it’s nearly impossible to determine whether one is better than another. Overall, the best option is determined by your debts, your income and future financial plans.
If you know you can pay off your debt within a short amount of time, balance transfers are better because you’ll have a 0% introductory APR. However, if you want to merge multiple other loans into a single one to have extra benefits, a debt consolidation loan might work better.
The key to finding the best solution is to study every option, ask for professional advice whenever you can and be cautious before making any decision.