Understanding balance transfer scheme
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Credit Card Applications » Research » Guides » Balance Transfer Cards » Understanding balance transfer scheme

Understanding balance transfer scheme

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Credit card debts have become increasingly common due to the economic fluctuations and recessions. Many schemes have therefore been developed to help people recover from debts and to pay the credit card companies. Balance transfer is a scheme that helps the individual recover from debt, by reducing the interest rate that is applied to the outstanding balance. The scheme works as follows: Transfer of balance: If the individual in debt applies for a balance transfer, then the outstanding balance from the old credit card is transferred onto a new credit card which the company offers. The outstanding amount on the new credit card will now reflect the amount due on the old credit card, and the old credit card will be cancelled. The offer: The offer for the balance transfer is that the total amount due is absolutely free of any interest rates for up to 12 months. The individual trying to pay off the balance due can do so without any worries about extra costs resulting from higher interest rates. The zero-interest period ensures that any payments made towards the credit card will be used to pay the actual debt, and not the amount resulting from the interest. The Catch: The catch in the balance transfer offer is that the interest rates after the 12 month period will be higher than usual. Any new purchases made from the new credit card cannot be paid until the old outstanding balance is taken care of first. This means that the new purchases made will keep accumulating the interest rates until they can be paid. The balance transfer credit card must not be used for new purchases for this very reason. Once the balance is paid, then the card can be used accordingly. Even if the entire balance cannot be paid within the zero-interest period, the outstanding balance after the interest free period will be charged a very high interest rate. Fees and other charges: The old credit card company may charge a process fee for the balance transfer onto a new credit card. Additionally, the credit card company offering the balance transfer may charge a one-time processing fee. There may be hidden charges and clauses for the balance transfer card. Going through the offer carefully is mandatory before applying for the deal. Advantage: The biggest advantage of the balanced transfer card is the interest free period offered. If carefully planned, the debt can be resolved within months with regular payments. Since there is no interest rate it is easier to plan the installments and manage the debt. During this time, although using the credit cards will not be possible, it will help in developing a controlled spending habit, which will help later to manage your finance. Downside: Balance transfer has a negative effect on your credit history and causes your credit scores to drop further. Balance transfer fees may seem like a big amount, especially when you have a debt. Also, the individual must be ready for the no credit card phase, before applying for the balance transfer offer.

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