When used properly, credit card balance transfers can be an effective alternative to going out and getting a debt consolidation loan.
Here are a few reasons why...Reason #1
First and foremost, the interest rates that you pay on balance transfers can be significantly lower than interest rates on consolidating loans. In fact, some credit card companies offer 0% interest credit cards to entice consumers to sign up. Other "low interest rate" offers are typically in the 1% to 3% range.Reason #2
One of the main problems with debt consolidation loans is that many lenders require that you offer up your home equity as security for the loan. If this is the case, you end up swapping unsecured debt for secured debt, which is never an ideal situation. Once your debt is secured by the equity in your home you no longer have the option of settling your debts for a discount, and you may end up losing that equity if you have to declare bankruptcy down the road.Reason #3
Points, loan processing fees, etc. If you go looking for a debt consolidation loan you will usually end up paying these type of fees. And although some credit card balance transfers (usually just the 0% credit card offers) do charge a "transfer fee", they are typically cheaper than a loan.
Here are a couple of things to "watch-out-for" regarding balance transfers from one credit card to another.Warning #1
1. Be aware that many credit card companies charge a balance transfer fee when you transfer a balance to your new card. A typical transfer fee is 3%. For example, on a $10,000 balance transfer, you would be charged $300.00.Warning #2
2. Be aware that your monthly minimum payment may increase compared to your old card. This is usually the case if the amount of the balance transfer is greater than 90% of your new credit limit. This percentage varies from credit card to credit card so make sure you read the fine print beforehand.Warning #3
3. All good things must come to and end, and the low interest and 0% interest rates on credit cards are no exception. You see, the low rates on balance transfers are only offered for an introductory period (usually 6 to 12 months, but as high as 18 months) after which the interest rates will rise, sometimes considerably. Therefore, read the fine print and learn what that rate will be after the introductory period. Of course, the "trick" to avoiding the higher rate in the first place is to transfer you credit card balance to another new, low interest credit card before the introductory period ends.Warning #4
4. If your credit is poor, you will have a difficult time taking advantage of credit card balance transfers. You will usually need good to excellent credit in order to qualify for these low interest offers.
Transferring your credit card balances in order to get out of debt faster works best when combined with an aggressive personal budget. Because you are paying mostly principal on your balance transfers, your objective should be to pay off as much of your credit card balance as possible in as short a time frame as possible. In order to accomplish this, a budget is essential.
If you can't qualify for a low interest or no interest credit card, there is another way of lowering the interest rates on your credit cards. By entering a debt management plan through a credit counseling agency, you can often achieve significant discounts on the interest rates you are being charged. As well, the credit counselor can also negotiate to have any late fees or over limit penalties eliminated from your credit card accounts. So if your credit is "less than perfect" and credit card balance transfers are not an option, you may be able to accomplish similar benefits by talking to a credit counseling and entering a debt management program.