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You filled out the application, got approved, and received your card in the mail. You made some purchases … then you made some more purchases … then the interest rate kicked in. All of a sudden, you have a high balance owed to the credit card company. You keep making payments, but you can’t seem to make any substantial progress in paying off your balance. This is where financial knowledge and a little bit of savvy come into play.
We constantly see advertisements for credit cards offering benefits such as “No transfer fees” or “Zero percent interest for 6 months.” However, what’s the purpose of transferring a credit card balance and how can it benefit you? Below are three reasons why you should transfer your credit card balance.
Interest Rate Relief:
Let’s say that you have a credit card with a limit of $1000, the maximum amount the credit card company will allow (lend) you to charge on your card. So, if you make a $1000 worth of purchases on your card, you have to pay back $1000. The interest rate on the card is the amount the credit card company charges for lending you that $1000. If you have charged the maximum amount, the credit card company will charge you 20% (or $200) on top of your balance. If you only have $100 a month to pay toward your credit card, then your payment is simply paying the interest on the card and not the actual balance (or principal). Transferring your balance to a lower interest credit card allows you to pay more on the principal—and potentially pay off your credit card faster—than you would pay with your current credit card. Even better, transferring your balance to a credit card offering a zero percent interest rate allows a period of time for you to make payments on purely your principal balance. Transferring your balance to a lower interest rate may give you a financial opportunity to start the race over, eliminate hurdles, and begin with a head start.
If you have multiple, maxed out credit cards with high-interest rates, consider transferring those balances to one low-interest rate card. This way you make only one monthly payment instead of managing multiple payments with high-interest rates. Rather than eating multiple elephants, one bite at a time, you can eat one elephant one bite at a time.
Improve Your Credit Score:
One of the factors that affect your credit score is your credit utilization ratio. It’s a fancy way of saying, “This is how much credit you have and how much you are using.” Multiple, maxed out or high balance credit cards impact your credit utilization ratio because you are using all available credit on all of your accounts. In other words, running up your credit cards lowers your credit score. By transferring the balances of multiple cards to one low-interest rate card (preferably zero percent), your credit utilization ratio improves because you now have one card with consolidated balances, rather than multiple high balance cards.
Transferring your credit card balance is a financially smart move that plays in your favor. By consolidating multiple balances into one easy-to-manage balance, you may be able to handle your payments easier, have a period of time to pay off your debt faster with a lower interest rate, and possibly improve your credit score in the process.
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