Everyone has heard the terms ‘balance transfer’ but few people put much thought into it. Perhaps you’ve done it a few times and perhaps you understand the concept. Or maybe you don’t. On one hand, people with credit cards should not carry a balance so, therefore, a balance transfer should not be necessary. On the other hand, some people cannot help but carry a balance. If you are one of those who do carry a balance, you should understand how the balance transfer works to that you can understand how to save money using it. The first step is understanding that what your balance is does not indicate exactly what you owe. You have an interest rate, which means a portion of your payment each month is being allotted toward what you owe in interest. The best way to pay off a card is to do it with a much lower interest rate or none at all so you’re not spending what is very usually thousands of additional dollars in interest over the life of your balance. So how is a balance transfer going to save you money? It’s simple.
Another credit card might be a good idea if you can find one with a low rate for balance transfers. In fact, many cards offer a long introductory period of six months to a year in which you pay no interest on transfers. This is going to allow you to go ahead and transfer balances from a card with an interest rate to one without an interest rate and allot all your payment to paying down – or off – the balance. Let’s say you have a $1000 balance and a 21% interest rate. Your minimum payment each month is $27.50. It’s not a lot, but it will take you 9 years and 11 months to pay off your card making the minimum payment and you would pay $2,224 over the course of that time. That’s more than double what you owe in the first place. Say you decide you’re going to pay $100 per month. It would still take you a year to pay off that debt and it would cost you an additional $108 and change in interest. If you transfer your balance to a card with no interest for a year and pay $100 per month, you could pay it off in 10 months and not pay anything additional. That’s how a balance transfer saves you money.
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