Credit Cards: Balance transfer - Is it a Good idea??
Remember seeing promotional offers on Credit Card Balance transfers? They looked like this:
Get an unbelievable 0% Balance Transfer*
WOW isn’t this a great deal? Yes of course! Usually such 0% interest lasted for the promotional period of about 3-6 months. The system of balance transfer allows a credit card holder to transfer the balance on his existing card to another card and enjoy the 0% interest period. This was a great offer for those who could now purchase and repay without paying a single penny as interest. The loophole in this system was that consumers could jump similar cards by transferring balances after having used the promotional period and thus avoid payment of interest.
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To plug this hole, credit card companies started charging fees for balance transfers. This virtually killed the concept of 0% balance transfer. The interest payment if now replaced with transfer fees and “other fees”. Credit card companies introduced this to cover their costs. Penalties on such cards are high and issuing fees on such cards are higher than normal cards. What you MUST watch out if for the interest rate after the promotional period. This could be a bomb waiting to explode as this post promotional rate is normally higher than a regular card.
So is a balance transfer a bad choice? Why should I transfer it from a regular card?
It is an effective method of saving on interest, if your credit card balance is fairly high. The issuing fees and balance transfer fees would then be negligible compared to the savings on interest. After the promotional period you must be able to pay your dues on time as penalties and interest on unpaid balances could be exorbitant. To avoid this, you could look at transferring the balance again to another card at the end of the promotional period. Always work out the savings on interest and make sure you read up the credit card contract for hidden fees. The hidden fees usually ruin all your calculations on savings.
For those with a lower balance, we recommend you not to transfer the balance to another card. You would be better of paying the interest on the regular card. The concept of 0% should not more mislead you. If you have small balances on multiple cards, then you could consolidate this into one card by transferring the balance. But make sure you don’t transfer the balance again after the promotional period. The whole idea of the transfer in this case is to save on interest, so work out your financials and pay up on time to make your balance transfer a smooth and fruitful one.
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