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In recent times, the practice of balance transfer has become pretty popular owing to the financial crunch being faced by a large number of people. It is a very easy way to postpone repayment of monies owed to the bank with not many consequences if not any at all. Before we look into the different situations in which one can use balance transfers, let us first try and understand how balance transfer works.
Balance transfer is a concept wherein one can transfer the outstanding balance on a credit card account onto another account. This will give time for the person to pay back the amount without having to default on the payment. All you have to do is open a new credit account and transfer the outstanding balance from your old account onto the new account. Once you do this, you will get more time to pay back the outstanding balance on the new account since it will have some initial period during which there will be an interest free holiday for you.
But there are a few things to keep in mind while doing a balance transfer. The first thing that you need to keep in mind is that you should not close your old credit account. If you do this, your debt to credit ratio will go up and this will adversely affect your credit score. the credit score is an indicator of your financial credibility which is maintained by the credit bureaus. The score is calculated based on a number of factors and the debt to credit ratio is one of them. Also ensure that you do not spend more than 30% of your credit limit. This will make you look like a compulsive borrower.
Another thing to keep in mind is to ensure that you do not spend on the new card before clearing out your old balance. You might be anxious to start spending on the new card since there might be a lot of offers that you will be getting in the beginning. But do be aware that the very reason that you got the card in the first place was to clear out your old balance. And it is better not to start spending on the new card before you sort out your old balance first.
Financial management is a very important part of asset building. Getting rich is not about earning a lot of money but about saving whatever you can while you can. Getting a new credit account will give you the time to get your affairs straightened out. Not paying back on a purchase beyond the due date for the amount owed would result in you being termed as a defaulter and once you are termed a defaulter your credit score would suffer. And once your credit score goes sore, you will not be able to get credit in the future for any purchase that you would want to make be it a loan for a car a house or even an education loan. Even getting a job would become difficult since your social security number would be linked to the account.