A balance transfer is an option through which debt is transferred from one account to another. These options are regularly associated with credit cards but can be used for many different types of credit, including loans. There are many reasons why transfers are a viable option for borrowers, including reducing the overall obligation and extending the deadline by which that obligation must be met. Lenders offer balance transfers as a means of generating profit. They may not earn as much had they initiated the loan but more than they would without the new business at all. In order to appreciate how balance transfers work and benefit consumers, there are three simple facts to understand.
Fact #1: Balance Transfers Reduce Your Total Debt
A lender who wants your business must incentivize you to make that move. The common way to do that is to offer you a zero-APR period and/or a low-interest period and/or a lowered interest rate overall. If a lender expects to carry the debt for two years, for instance, it may offer zero APR for six months, a promotional low interest rate for months seven through 12 and then a lower interest rate than you’re paying now for the final 12 months. Debt has a total value to you. If you owe $1,200 and will pay $25 a month in interest over 12 months, then the total negative value to you is $1,500. If through promotional benefits you reduce that interest to $5 a month, that is a positive value to you of $240.
Fact #2: Balance Transfers Are Not Repayment
Consumers must appreciate that balance transfers are not repayment of the debt. Certainly, the original lender is being repaid, and, assuming a total transfer, your obligation to them concluded, but the debt is simply shifted. The terms may change, including how much interest you’ll pay and how much time you have pay, but the debt is still yours. It is also important to understand that a balance transfer doesn’t simply absolve you of your obligations the moment you agree. Transfers take time to finalize on all sides of an arrangement. You must carefully consider timing. If a payment is due in the short-term, you may still have to pay it to the current lender. If over-payment occurs due to it, that money will be returned.
Fact #3: Borrowers Can’t Dictate How Payments Are Allocated
“Balance transfers are repeatable, which means that you can in theory shift debt to a new lender and then again to another; however, most borrowers shouldn’t count on it,” said Finance Globe. The more you transfer, the less it’s an option and the more your credit score matters. Also, if you have a transferred and an original balance on the same account, you can’t dictate how payment is applied. Keep in mind that Credit Card Act of 2009 requires creditors to apply any payment beyond the minimum to the debt with the highest interest. So, if you have $1,000 in transferred debt at zero APR, $500 in debt at your standard rate and a $25 minimum payment, the credit card company can put that $25 toward the transferred debt, which means you’d accrue even more debt the following month. In order to reduce the debt on which interested is charged, you would have to pay some amount above and beyond the minimum.
Final Thoughts
Balance transfer options vary from one lender to the next, and the offers you receive will depend on your credit rating, income and other factors. These transfers are a tool that you can use to proactively manage your debt. Shop around for the best offers, and know that lenders are often willing to negotiate with good borrowers. Our consumeristic society tends to paint debt in a negative light, but balance transfers when used wisely are a means through which you can do more with your money.
