When emergency and unforeseen expenses happen, and you don’t have a rainy day fund, it can lead you up to the neck in debt, especially when using your credit card to pay for these emergency expenses.
Filipino millennials even use credit to pay for daily living expenses, which rack up more debt to their credit card.
Even if you’re paying the monthly minimum, It can be hard to relax as the interest rate keeps increasing month per month.
When you’re carrying an increasing high-interest credit debt, getting another credit card won’t help your situation. However, the right kind of credit card like a balance transfer credit card, for instance, can help you take the heavyweight off your shoulders.
What is a Balance Transfer?
A balance transfer as its name suggests - is a process which lets you transfer your existing balance on a credit card to a new one.
The main purpose of this type of credit card is to help consumers consolidate their debt. For instance, if you’re carrying high-interest debt on multiple credit cards, most of your stress may come the fact that you’re managing multiple debts at once.
And considering how some credit card companies can easily give you a new credit card when you’re already an existing credit card user, maximizing your credit limit on all credit cards is a common yet chaotic situation.
So, how can you free yourself from debt without paying more than what you owe?
You can get around this by getting a balance transfer credit card and transferring the high-interest debts from different credit cards to one card with a lower interest rate.
This allows you to eliminate your credit debt faster by paying down more on the principal balance each month.
When you have a high-interest debt on your credit card, you end up paying more than what you owe because most of your payment goes to the interest that increases month per month.
How does Balance Transfer Work?
With a balance transfer, the debt is moved from Card A to Card B. Usually, your credit card charges high-interest rates (12, 18, 20 percent annually).
Let’s say you have accumulated P100,000 debt on two (2) credit cards that you own at 18% APR each. Assuming you’ve maxed out your credit limits, you would pay a total of P764 monthly accrued interest on each credit card.
Accrued interest refers to the accumulated interest on your debt that the bank has charged but hasn’t been paid.
You would pay a total of P18,336 in the interest in your first year. Yikes.
Now, what if you’ve only paid the P2000 on each card monthly until the balance is gone. In that case, getting yourself out of debt would take 25 months - or two years and nine months and cost P35,200 in interest on top of your balance.
These interest you pay goes to the bank.
So when you get a balance transfer credit card with no interest rate, here’s what happens:
- You have a multiple credit card debt from Bank A and B.
- You see an ad of Bank C, which offers a 0% APR on balance transfers for 12 months with no balance transfer fee.
- You apply and are approved for Bank C’s balance transfer credit card.
- Bank C pays off the debt you have from Bank A and Bank B.
- You start paying the balance transferred to your new Bank C credit card.
With the new balance transfer card, you don’t have to pay for any interest. Using the example given above, the P764 monthly interest you pay for each card goes straight towards paying down your debt. Eventually, you could save thousands of pesos in interest.
Should you consider getting a balance transfer?
Transferring balances to a single lower-interest or zero-interest credit card can make getting rid of your debt a lot easier and convenient.
For instance, if you’re having a hard time keeping track of the payment due dates and often find yourself charged with compounding interest and late payment fees, then applying for a balance transfer credit card might be wise.
This is one of the debt consolidation methods. Debt consolidation is a financial strategy, which merges multiple high-interest bills into one single debt that is paid off by a loan or a lower-interest or zero-interest credit card.
Consolidating your credit card debts can simplify your payments and untangles the mess you face every month trying to keep up with multiple bills from multiple banks and multiple payment deadlines.
It also provides you with breathing space to repay your debts to lower or zero-interest rates, convenient payment schedules and 0% balance transfers.
Here’s one example of how much money debt consolidation could save you on the same amount of debt and with the same monthly payment amount:
Annual Percentage Rate
Total Amount Paid
Credit Card with High-Interest Rate
Consolidate with Balance Transfer Card
P51,500 (with 3% Balance Transfer Fee)
0% for 12 months, then 18% when the promotional period ends
Situations where you can use balance transfer for debt consolidation
Consolidating your debt with a balance transfer isn’t always the best solution, but there are several situations when it can be a better option.
1. When you can save more money. The idea of debt consolidation is that you can cut down on how much interest you pay going forward. Balance transfer cards usually have a 0% intro APR offers from six to 12 months.
Make sure you calculate the fees that will cost you when getting a balance transfer, it might seem cheaper but the balance transfer fees and any annual fee charged by your new credit card.
2. When you’re having difficulties paying off your debts. One of the challenges of having multiple debts is keeping track of all the payments.
While there are many apps available to help you organized, with multiple debts on top of your bills, it still can be a struggle. Consolidating your debt can help you reduce missed payments that result in extra fees and improve your financial management.
Things to Consider Before Getting a Balance Transfer
A balance transfer can really be useful if you use it the right way. However, there are also potential pitfalls that come with it. Before you get one, there are a few things to consider to figure out if it’s the right move for you.
- How much you owe. While a balance transfer can provide temporary relief from paying with a high-interest rate, if your balance is too big, transferring your balance may make it worse.
You might get tempted on paying only the minimum, rather than paying more than what is required. It is important to commit to paying the debt off within the 0% interest rate.
Otherwise, the high-interest rate will start accruing again, and it would be a waste of opportunity if you didn’t make the most of the promotional interest rate.
- Balance Transfer fees. Usually, when you transfer a balance to a new credit card, depending on the credit card issuer, you might be subject to a transfer fee, which can be between 3%-5% of the total amount transferred.
This might be a small amount added to your total balance due. However, in comparison to paying on a high-interest credit card, you can still save money.
It’s essential to calculate the monthly interest you pay and how much you will be able to save with a zero-interest balance transfer credit card.
- You may be tempted to spend more. If you have a hard time on impulse buying, getting a new credit card might not be a good idea.
Some balance transfer credit card’s 0% interest rate only applies to the balance transferred and not on new purchases.
Adding more debt defeats the whole purpose of getting a balance transfer, this only puts you in a bigger financial mess than when you started, so it doesn’t make sense to rack up more.
- The 0% interest rate is only temporary. The teaser rate of an extra low-interest rate (APR) or sometimes zero-interest rate doesn’t last forever. This usually lasts between 6 to 12 months or occasionally more.
Eventually, the interest rate reverts back to its normal rate, which could be even higher than the interest rate you had with your previous credit card.
The idea of getting a balance transfer credit card is to get rid of debt faster. Prioritise becoming debt-free before the promotional period expires.
- Credit limit may not be enough. Although the credit card issuer will approve your balance transfer, they don’t usually guarantee that all your balance will be transferred.
The bank may give you a credit limit depending on your credit score, and it may be lower than the balance you’d like to transfer.
When this happens, calculate how much you will be able to pay for the old and new credit card. If it causes you more than what you already owe, it might be the best option to consolidate your debt.
Ultimately, you should carefully consider and plan everything before signing up for a balance transfer credit card. One misstep and you can rack up more debt which can hurt your credit score.
Remember that your previous card, now that it has been paid off, doesn’t mean you can start using it again. Don’t start spending your old card just because your balance transfer gave you more room.
How to Make the Most of Your Balance Transfer
If you decide to get a balance transfer, the offer is not permanent - the low or no-interest rate is restricted to a set period. That means you have to tackle your debt quickly to get the maximum benefit from your new card. Here’s how you can do it:
- List all your existing credit card debt.
Before you transfer your balance to a new credit card, make a list of all your current credit card balances and the interest rate on each account.
This will give you an idea of how much total debt you have and identify which balances you should transfer first.
Since you may not be able to transfer all of your debt to your new card, it’s best to start transferring debt with the highest APR first so you can maximize your savings.
Transfer the remaining balances that you think you might be able to pay during the zero-interest-rate period. Start with the highest interest rates first then work your way to minimizing your debt down to the lowest APR.
- Make sure you fully understand the terms and conditions.
Terms and conditions may vary from one card to another. Understanding the fine print allows you to ensure that you’re using the credit card properly.
Initially, you need to know when the 0% APR is up and what the regular interest rate will be after the intro period ends. You also have to take note of the interest rate for new purchases as these may differ.
The introductory offer may not apply for the new purchases which will only accumulate more debt to your account, so it’s better not to consider using your new card for new purchases.
- Set up a repayment plan.
This is your chance to create your plan of attack. Start by outlining how you’ll pay off all your debt, base it on how long you will have to pay for your debt without the interest.
For instance, if your card offers 12 months of zero-interest-rate, assess how much you can pay off each month to get rid of your debt within the 12-month period. Can you afford to pay more than the minimum? Paying more than the minimum can help you pay off debt faster.
- Make your credit payments on time.
Now that you’ve consolidated your debts paying your debt on time shouldn’t be a problem. Late payments can impact your credit score and cause you to incur late fees.
Additionally, you might lose your no-interest rate benefit if you miss your payments. So, make sure to pay on time and to check the terms and agreement to know what to expect if you miss a payment.
- Keep your credit accounts open.
Don’t close your accounts just because you’ve transferred all your balances to a new card. When you close your credit cards, It can reduce your credit history and impact your credit scores.
Unless you’re having a hard time paying for the annual fees, don’t close your other credit cards - and avoid using them.
The Road to Becoming Debt-Free with Balance Transfer
The hardest part of paying off debt is getting started. Getting a balance transfer can be a great way to jump-start your debt-repayment plan and save you money. It’s also a great tool to help you take charge of your finances and debt management.
Once you’ve started the momentum, go through each of the steps to maximize your balance transfer. Remember, each payment that you make takes you closer to becoming debt-free.
If you’re looking for a good credit card to transfer your balances, you can compare balance transfer credit cards with GoBear to get out of debt fast.