What Is Balance Transfer? It Is a Way to Lower Monthly Debt Payments

What is balance transfer? A balance transfer is moving monetary debt from one account to another with a 0 interest rate (or low interest rate) for a set period of time. But that does not mean that the debt has gone: it means that you will not be paying interest on that debt for a set period of time. For example, if you owe $100 and that $100 loan has a 5% simple interest rate on it, that means that over the course of a year, you will be charged 5% or $5 in interest for the privilege of borrowing that money. If you transfer that $100 to a 0 balance transfer account, you will not be charged interest for a set period of time, but you will indeed still owe that $100 debt.

What Is Balance Transfer?

Be careful about making payments on time when you transfer balances. On most 0 balance transfer accounts, if you are late on one payment, your interest rates could skyrocket. Therefore, when you set up a 0 interest account, at the same time set up auto-payments so that you never make a late payment.

Many people who are experiencing an increasing amount of debt seek out 0 balance transfer arrangements as a way to stem the tide, but it does not solve your problem. If you are one of them, take this time to create a budget wherein you can live within your means. Do not look at a 0 balance transfer account as a green light to increase your spending. Look at it as a life-saver and stop spending more than you earn right now.

Use the card only for the balance transfer, but not for new purchases and if you have balances on the card at the already, pay them off or switch them to another credit card. When you use a credit card as a balance transfer card, you want only that 0 balance debt on the card if you can help it. If you have a situation where you have a $5,000 debt on the credit card with significant interest and you get a 0 balance transfer offer on that card, the $5,000 debt will continue to rack up high interest charges while the other part of the debt is at 0 interest. Prior to the passage of the Credit Card Act of 2009, any amount of money you paid to reduce the debt went to the 0 interest balance. Since the passage of the law, the minimum monthly payment goes to the 0 balance but anything over the minimum goes to the debt with the highest interest rate.

What Is Balance Transfer Pros, Cons

Here are pros and cons on balance transfer arrangements:

The Pros:

•Your interest rate is reduced to 0 or a far lower rate than you are now paying
•There is the possibility of incorporating more debts and loans into this account at 0 interest for the term

•Long period to pay back loan is possible

The Cons:

•Hidden charges in terms and conditions
•Interest rates that balloon out if you are late on a payment
•Fees for transferring the debt to the 0 balance account
•Short period to take advantage of the low rates
•New purchases on card may receive a high interest rate
•Rate jumps at end of period.

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