By Tyler Philbrook, IamTheFutureMe.com
In credit card debt? You’re not alone. According to Value Penguin, this is an all too common scenario with the average household owing $16,048. To compound the problem, you may only be able to afford the minimum payment, but the interest is so high most of the money goes straight to that.
Alongside those pesky credit card bills, your mailbox may be inundated with credit card balance transfer offers. With the new year around the corner, getting your finances in order may be at the top of your resolution list. Here are some things to keep in mind when determining the best card offer for your situation:
How Much of My Debt Should I Transfer?
Look at all of your credit card statements and write down your outstanding balance amounts and corresponding interest rates. If you have previously taken advantage of a promotional offer of a low rate (for instance, an introductory rate for a credit card you recently obtained or a previous balance transfer), you may have different interest rates on different portions of your outstanding balances on the same credit card account.
The Card Act of 2009 ensures that credit card issuers apply payments, including balance transfers, to the highest interest balances first. This allows you to pay off an older, higher rate balance without having to pay off a lower rate promotional balance first, while the old balance continues to revolve and charge you a high interest rate.
Write down the current minimum or other payment amount you are making on each card account you carry and note the outstanding balance of the highest interest-bearing account. That is what you want to pay off first with a balance transfer to a lower interest rate.
You cannot pay off a balance on a credit card with a balance transfer from the same credit card account, which is known as “kiting.” You will need to make a balance transfer to another card account that you currently have, or obtain a new credit card account that offers a lower interest rate or even 0% interest for a period of time.
How Long Will It Take To Pay Off?
Review your budget. How much are you paying on these accounts and how much can you pay a month? For example, if you have a low rate for six months and transfer $3,000, divide it by the time that the rate is valid and confirm that you are financially able to pay it off in time. If you are going to need a year or more, keep that in mind before you go shopping for cards. You don’t want your bill to skyrocket after six months when the 0% interest rate ends.
Obtaining a New Account Offer with a Balance Transfer
If you need to obtain a new credit card account in order to take advantage of a low interest balance transfer rate, you will need to know what your credit limit and cash limits will be. Most issuers treat balance transfers as a cash advance, meaning that interest begins to accrue on the date of posting, rather than providing a grace (interest free) period of as much as 30 days. You will only be able to transfer an amount that does not exceed your cash limit on the new card.
Obtaining new credit card accounts can affect your credit rating, so be careful how many accounts you open in a short amount of time. If you opened a 12-month interest free account to purchase a large item like a TV or sofa, and in less than six months open a new credit card account, your credit score may drop for a period of time until you have shown the ability to repay all of your debt, then your score will go back up.
Think carefully about any credit applications you may be making in the next six months. The lower your credit score, the higher your interest rate, so if you are planning any big ticket purchases like a vehicle or a house, you wouldn’t want to obtain any other new lines of credit.
Your Credit Card Options
CreditKarma.com, CompareCards.com and CreditCards.com are good resources and list the best current offers by large issuers. Your credit score has a huge effect on the type of cards for which you qualify. Doing a balance transfer with bad credit can be difficult, but you do have options.
Going to your financial institution is another great choice. Most people have been with the same one for many years. They want you to continue to use them and usually offer other programs that will also benefit you. To get more information on what exactly it will take to get a credit card balance transfer, call or go to your local branch and ask. They will be more than happy to assist.
One reason credit unions are a good option is that they are not-for-profit, so each member is a shareholder and not simply another customer. Because of this, they are committed to helping the local community, and when you go in and ask for a balance transfer they are not only more likely to be able to help you, but also more likely to give you better deals.
According to Magnify Money, cards from financial institutions offering balance transfers often charge 3 to 4% of the amount transferred just to make a transfer, but many credit unions do not charge this fee. Be sure to read the entire offer, including the fee and interest schedule before you commit. Credit unions typically have lower rates once the promotional rate is up.
The Relief of a Balance Transfer
You go back to your mailbox six months after getting your new card. Your statement shows that the balance has gone down by over 35% and you’re on track to have it completely paid off by the end of the year.
By taking the time to explore your options, visit your financial institution and secure this transfer, you have been able to ease your financial burden so that you are able to focus your energy on saving and investing for your other life goals.