Understanding 0% Balance Transfers
Balance Transfers Will Save You Money and Help You Get Out of Debt Faster
Obviously, transferring debt to a credit card that charges no interest for a year will save you money. What surprises people is just how much money they can save. Taking standard balance transfer fees into consideration, a person with a 14% interest rate can expect to save around $100 for every $1,000 they transfer to a 0% card. For a person with $5,000 in credit card debt, the savings will likely exceed $500.
Saving $500 in one year is great. However, the most overlooked benefit of balance transfers is the role a 0% rate can play in getting you out of debt quicker. Here’s a prime example:
A person with $5,000 in debt and an average interest rate of 14% will need to pay $250 every month for the next 8 years to become debt free. That’s right: 8 YEARS. In that time, they’ll spend over $1,400 on interest.
However, if that same person does a 0% balance transfer and makes a $250 monthly payment, their debt will be reduced by close to 60% in just one year. If the interest rate goes back to 14% after the 0% period expires, it will only take one more year of $250 monthly payments to be completely free of credit card debt.
By taking advantage of a 0% balance transfer, a person can get out of debt 6 years quicker and save over $1,000 in interest. There truly is no easier way to free oneself from the burden of credit card debt. This, unfortunately, is the reason banks are making it more and more difficult for consumers to get approved for these offers. Fortunately, as long as 0% balance transfers are available, a credit card debt free life doesn’t have to be the road less traveled.
Securing a 0% APR for a Full Year
The credit crunch has severely impacted the duration of 0% APR balance transfers and all but completely eliminated fixed APR for life balance transfers. While it was common to see 0% offers lasting one year to as much as 15 months during the credit boom, most credit cards now only offer 0% rates for 6 months.
The Current State of Balance Transfer Fees
From 2006 to 2008, a number of credit cards offered 0% interest rates on no fee balance transfers. Today, these offers have been pulled from the market. Presently, a few companies offer no fee balance transfers, but they do not offer 0% rates.
The industry standard fee for balance transfers is currently 3% to 5%. These fees are vastly offset by the savings a 0% balance transfer can provide. For example, a person who has a 20% interest rate that does a 0% balance transfer for 1 year with a 5% fee will pay 75% less in interest and fees than they would without a balance transfer.
Frequently Asked Balance Transfer Questions?
Which Credit Cards Should I Transfer Balances From First?
Although it should go without saying, it makes the most economic sense to transfer balances from credit cards with the highest interest rates first. Some "experts" may suggest eliminating cards with low balances first as a means to feel like you’re making progress. However, when all is said and done, the most important thing is maximizing the amount of money you save.
How Long Does it Take for a Balance Transfer to Occur?
While it varies from company to company, you should anticipate at least a few weeks for your balance transfers to clear. During this time, closely monitor you credit card accounts online and continue to make payments in a timely fashion. Missing a payment on a credit card can cause your account to default, leading to interest rates of 29% or more. With credit card companies anxious to raise rates on consumers, it’s much better to be safe than sorry.
Will Doing a Balance Transfer Hurt My Credit Score?
While there is no definitive answer to this question, it is possible to hurt your credit score if you close your old accounts before paying down your debt. This issue arises because a primary component of your credit score is based on how much of your available credit you are using. A person using 80% of their available credit appears maxed out to lenders. Thus, keeping your old credit card accounts open will reduce your overall credit usage, which could actually improve your score.
*Important Disclaimer: See online credit card applications for complete details about terms and conditions. Reasonable efforts are made to maintain accurate information. However all credit card information is presented without warranty. When you click on the “Apply Now" button, you can review the credit card terms and conditions on the issuing company's website.
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