Credit Card Balance Transfer: Use It For Your Great Benefit

   

If you have some credit card debt and have more than 1 credit card , you could possibly take a very good benefit of credit card balance transfer. But beware, the motivation behind this is that the credit card company wants your money for their profit and they make it a little bit tricky and if you are not careful, you will end up have more debt than before.

Balance transfer is an offer from a credit card company to ‘migrate’ a credit card debt from one company to the other. Usually they make it attractive by offering a ridiculously low interest rate of the amount being transfered. Some credit card company will apply that low interest rate for the life of that debt, but more likely they will do it for a limited time only.

The motivation from the credit card company is pretty obvious, they want more debt to be transfer to them so that they can earn more interest. With this reason in mind, then we need to proceed with careful as there are certain guideline that we need to know to maximize the benefit of the balance transfer offer.

For your side, your goal should be to pay off the credit card debt as soon as possible with the least expensive way.

How It Works

For example: “Transfer your credit card balance with only 2.99% interest rate for the first 6 months”. What does it means? (For detail calculation, please refer to the Part 2 of this article. Just click here.)

• Let say you have $5000 debt on a credit card, the interest rate is 18% and the minimum monthly payment is 2.5% or $120.
• Then you will pay around $125 monthly (consist of the interest and some principal of the debt)
• Remember that if the capital is reduced, the interest will be reduced as well for the next month, hence giving you compounding effect.
• When you do balance transfer, due to minimum payment policy, you still pay about the same, but since the interest is way smaller, your money is paying more toward capital the principal
• At this example, you will save around $350 during the 6 months period. This saving is real saving (as opposed to ‘pseudo saving’ e.g: not going to restaurant is ‘pseudo saving’ because even you don’t go you don’t get additional benefit anyway – this is just ‘opportunity cost’) .
• But with balance transfer, if you don’t do it, you just have to pay the money to your credit card company. You simply cannot avoid the obligation (unless you declare yourself bankrupt).

How To Do Balance Transfer

The balance transfer itself is quite easy. This is just a matter to fill up ‘Balance Transfer’ request form or a simple call to the customer service and your transfer will be executed. There is no real approval, as long as you still have credit that can be used (remaining credit), then it’s very straight forward.

..But Before That..

Before doing the transfer, make sure you understand the important notes below:

1. If possible, for your maximum benefit, do a balance transfer to an empty credit card. Because, the balance transfer’s special rate only applies to the amount you transfer, the existing debt will still have ‘normal’ rate applies to it.
2. If you don’t have ‘empty credit card’, we can do several balance transfer before the big one. For example should you have 2 or 3 credit card A, B and C. Say, all of them got some debt. Then find out which card offer the best rate on balance transfer, and we will try to make that card empty. For example, credit card B is offering the best balance transfer rate but there is $2000 debt on that credit card. Then you can transfer $500 debt to card A and $1500 to credit card C. If you cannot make it totally empty just do as much as possible. Once the credit card B is (almost) empty, then do the big balance transfer as much as possible from the highest rate credit card (which one between credit card A or C that has the highest interest rate)
3. If all of your credit card are (almost) full. You can do alternatively open a new credit card account. Make sure you have the best rate and the longest period (12 months special rates is better than 6 months , etc). But VERY IMPORTANT: you don’t want to have additional debt, once the balance is transferred to the new card, you need to close the old card. Otherwise the temptation is too big and you will end up with worse condition in term of debt. If you have difficulty to get a new card, go to a big bank that give financial advice, tell them you want to ‘consolidate credit card debt’ to the new credit card. Also advise that after the transfer you will close the other credit card. (But you will need to still have at least 2 credit cards – I’ll explain below)

After The Balance Transfer

1. Do not use the credit card that the balanced transferred to. The credit card company will apply the high (‘normal’) interest rate to any new purchase. Additionally any payment that you made to that credit card will be allocated to the lowest rate first.Let me illustrate here: Say you have $5000 balanced transferred with 2.99% interest rate. If you use $1000 on this credit card (after the transfer), the $1000 will have 18% interest rate.But not only that, if then you pay that $1000 off, thinking that you will wipe off that higher rate chunk, you won’t get it. That payment (or any other payment) will be paying the lower interest part first. In this case, after you pay $1000, your debt structure is: $4000 with 2.99%interest and $1000 with 18%.
2. Hence, you need at least another credit card for your daily use. So, only 2 credit card in total. One is the one full of debt , the other one is empty credit card that being use for daily transaction. MAKE SURE YOU PAY OFF THIS CREDIT CARD EVERY TIME.
3. Once the special rate period has elapsed, consider swapping (transfer the balance to the other credit card, and use this credit as your transaction) i.e: do this balance transferred process all over again. The inconvenience is merely to change all those direct debit arrangement (e.g: your direct debit of your mobile phone , etc) – But you will pay off the debt very quickly.
4. If you have other debt to pay, concentrate more on the debt that has higher interest rate. Meaning: if you have extra money, rather than paying extra on this credit card your money will work harder if you divert it to the higher rate debt. For this credit card, just pay the minimum amount.
5. However, if your sole debt is the one you just have transferred, you need to make use of this special rate period to pay off as much money as possible that you can spare because most of the money will be reducing the principal of the debt. The debt component will be very small.

Hope this is useful..

Next: Part 2 – Credit Card Balance Transfer: Your Own Calculation

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Denis Kristanda  

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