Balance Transfers: The Worst Kept Secret in Personal Finance!
Understanding Balance Transfers
What if we told you, you didn’t have to pay interest or fees on your credit card balance for a whole year? What if we told you…doing so could help you get out of debt faster? Would you believe us? It can’t be that easy…can it? Well, the truth is, it can be that easy! Not paying interest can be very beneficial… if done correctly, but not enough people know about this debt hack! Introducing balance transfers…
Yofii vs. Interest & Fees
If you’ve been with Yofii for some time, you know we’re not fans of interest rates! We have at least 3 separate blog posts discussing interest rates because an educated consumer makes fewer mistakes! Interest fees can be a killer, sometimes even when you use your credit responsibly. Interest fees are how credit card companies make money, but we’re not against credit card companies. Research shows, more than 50% of credit card users make minimum payments to their credit cards. The real scary part is, even if you stop using your credit card altogether and focus on making your minimum payments, it will still take years to pay off your balance. These are the nightmares that haunt the Yofii team.
Debt.com breakdowns paying minimum payments to credit card debt as:
“Let’s say you have a credit card with a fair 2.5% minimum payment schedule. The APR on the credit card is 18%. You run up a $1,000 balance and you want to pay it off. So, you stop charging and make your minimum payments on time every month to get out of debt.
The problem is that if you only stick with the minimum payment schedule, it will take 62 months to eliminate the balance in full. That’s just over five years to repay a $1,000 balance. And that’s only if you stop making charges!” – Debt.com
What is a balance transfer?
Here at Yofii, we relate Balance Transfers to mythical creatures that are both everywhere and nowhere. If you know what they are, you can spot them everywhere. If you don’t know what they are, you may think of a middle-aged hairy man wearing a unicorn costume. Now we don’t judge, but, that’s what that is. For an official definition on balance transfers, we look to Credit Karma.
Credit Karma defines balances transfers as “a process that lets you move debt on a credit card or from a loan to a different credit card. You’ll still have to repay the debt, but a balance transfer could help you combine multiple payments onto one card. In some cases, it can reduce the amount of interest you’ll pay, assuming the balance is transferred to a lower interest card.” – Credit Karma
Balance transfers are attractive because you typically get a much lower interest rate. In many instances, you may actually receive 0% interest for typically 12 months or more.
How do I get a balance transfer?
Balance transfers offers are often received when signing on for a new credit card. In other instances, your bank may feel generous and send you a balance transfer offer in the mail. Depending on the banks or credit card companies you use, you may be able to apply for balance transfers online. There are a lot of banks who frequently extend balance transfer offers to their customers. In the event you sign up for a new credit card, you will be able to claim your balance transfer. Balance transfers need to be approved within the offer’s specified expiration period.
While balance transfers are awesome, you still have to receive approval by your bank or credit card company to execute the transfer. The bank or credit card company can choose to either approve a partial amount or the full amount depending on their own criteria. Your credit limit is usually one of the biggest factors which impact their decisions. While you wait for your balance transfer to clear, you still need to continue making your payments on time. Some balance transfers can take up to 3-weeks to complete and some can take longer!
What balances should I transfer using a Balance Transfer?
Remember how we said balance transfers are a little like mythical creatures? Well just like mythical creatures, you need to make sure you make the most out of them. Balance transfer offers can be sporadic and you may consistently receive balance transfers! When you’re using a balance transfer, you need to analyze which cards you want to transfer. The goal with your balance transfer should be to minimize your interest payments. If you can lower your interest payments, you can pay off your debt faster. Before making your first balance transfer, you should be doing the following”
- Find out the balance transfer fee
- This fee is usually the lesser of a fee or a percentage. We typically see a minimum fee of $25 or a 3% transaction fee, whichever is lowest. Not all balance transfers are the same, so if your terms are better or worse, don’t worry and focus on the impact it’ll have on your debt.
- Check the interest rates on the balances you’re transferring
- We recommend transferring your highest interest rates.
- Understand the length of the grace period
- Example: Balance transfer offer for 0% interest for 12 months.
- Define your payment plan
- You may need to alter your lifestyle to be able to pay your balance off within the promotional period. If you need help with managing your money within your needs, check out our old blog: How to Manage Your Money
How can I benefit from a balance transfer?
The biggest benefit offered by balance transfers is their low-interest rates. In many instances, you can find balance transfer offers with interest as low as 0% for up to 24-months. Do you have one or more credit cards or loans that are charging you a high interest rate? Completing a balance transfer will allow you to pay off your debt faster. When you don’t have to pay interest and/or fees on your debt, you realize how much faster you can get out of debt. Balance transfers are a type of debt consolidation method. You should be very cautious of debt consolidation services as not all companies have great business practices, and some of the services can be scams.
The second indirect benefit is many times the cards/banks that offer balance transfers oftentimes offer better terms. If you are transferring your balance from a credit card with high fees, short grace periods, and high penalties, completing a balance transfer is an opportunity to take advantage of better terms.
Do balance transfers affect my credit score?
While balance transfers usually don’t affect the person’s credit score, the way you receive the balance transfer can affect your credit score. Whenever you apply for a new credit card, that application is known as a hard inquiry against your credit report. Hard inquiries against your credit report can lower your credit score. Each inquiry affects your score for anywhere between one to two years. Hard inquiries usually reduce your credit score by a few points. If you have a lot of credit and a long history, these hard inquiries won’t have as large an impact as someone with little credit history.
What happens if I’m denied the new credit card that’s providing a balance transfer offer? Unfortunately, being denied credit negatively affects your credit score. We recommend you check your credit score before applying for a balance transfer with one of the credit bureaus or Free Credit Scoring Services/Applications in the market.
What to look for in a balance transfer?
When applying for a balance transfer, we recommend you ensure the balance transfer offer you are applying for does not offer a promotional deferred interest rate. We at Yofii do not like Promotional Deferred Interest Rates. We’ve had bad experiences with these types of interest rates and many people share our bad experiences. These types of promotional interest rates can be found on store cards.
When looking at a balance transfer offer and considering your credit score, we recommend you look at how the balance transfer will positively impact your debt. If you can pay off thousands of dollars and save hundreds on interest rates, we believe that’s a decent tradeoff for an inquiry against your credit score.
What are the downsides of balance transfers?
Balance transfers that are not correctly managed can end up being very expensive. First, balance transfer offers always have a balance transfer fee which can be up to 5% of the balance being transferred. Second, the credit card offering you the balance transfer may sometimes come with an annual fee. Third, depending on how much of your credit limit is being used, your balance transfer may negatively impact your credit score if you’re utilizing over 30% of your Credit Limit.
Whenever you are considering a balance transfer, please consider both the positives and negatives of completing a balance transfer. In most instances, a balance transfer will be more beneficial to your financial situation as you have an opportunity to pay off your debt faster at a lower interest rate. If you are temporarily lowering your credit score by applying for a new card but paying off a large amount of your debt at 0% interest, you are winning in our eyes.