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Balance transfer is a relatively new technique that helps you through difficult times without defaulting on your credit card payments. A lot of banks actually encourage this given that they get more business out of it and also the customer is not lost. So what is balance transfer and how can it help you?
If you have a credit card and are unable to make the payments that are due at the end of the grace period, you have three options. The first option is to pay the minimum due at the end of every month and then pay interest on the outstanding amount. Now this interest rate will be very high compared to traditional loans given that it is a credit card loan. The second option is to take a conventional loan and repay the dues on the credit card and take your time in paying off the other loan. But to do this you will need to have a good credit record. No bank will be able to provide a conventional loan in that timeframe if you do not have a spectacular credit line. The third option is to apply for a balance transfer. Defaulting on the loan is not something that we are going to discuss as it is not really an option!
A balance transfer is very simple if you know what you are doing. When you have a huge outstanding balance on your current credit card, you need to open a new credit account. Find a credit card company with an introductory offer where you do not have to pay any interest on the amount borrowed for the first six months or even a year.
A lot of credit card companies will do this to woo new customers into getting their credit cards and take advantage of the introductory rates. All you have to do with this card is to pay the minimum due every month without having to pay any interest. Sometimes, even the minimum due per month will be waived. But obviously you will have to pay for the balance to be transferred from the old credit account to the new credit account. But this will be a small amount compared to the savings that you will be making by not having to pay interest to the old credit card company. At the end of the deal every body is happy. The old credit card company gets its money that you owed, the new card company gets a customer who will pay the borrowed amount in a year and you get some breathing space to sort out your finances and plan to repay the loan.
Taking a balance transfer must be the last option rather than the first step to financial freedom. Do not use it in haste as it will show badly on your credit record if you have used it more than once.