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Bankruptcy is not the only way to get out of a debt scenario. There are many schemes and solutions designed to help people get relief from debts and pay back their outstanding balances. Balance transfer scheme is one such solution for the debt problem that many face during tough economic times.
There are both positive effects and negative effects of balance transfers. A complete understanding of both of them is needed to make a good financial decision.
A balance transfer is very helpful in paying off the outstanding debt, without the high interest rates. The best aspect of balance transfer scheme is the attractive zero percent interest offer that holds good for a sufficient period of time, during which the debt can be cleared off.
The individual opting for a balance transfer gets a brand new credit card to which, all the outstanding balance from the old card is transferred. The new card carrying the outstanding balance has a zero percent interest rates for twelve to eighteen months. During this time, any payment made towards the credit card goes only towards clearing off the outstanding balance remaining. The individual can clear off the debts without worrying about the growing interest rates and its balance every month. The balance reduces with every single payment, without the new interest amount being added. This is a great way to improve credit scores by slowing dissolving the debt amount, with every single payment. However small the amount is, it still reduces the balance and makes some progress in resolving the debt. It is easier to route the money and complete the payment without the burden of balance. With the routine bill payment, it is possible to develop a disciplined spending habit, and therefore eliminate any chance of landing in future debt caused by negligent use of credit card.
The balance transfer card, offers the zero-interest plan only on the outstanding balance carried from the old card. Any new purchases made will be charged a high interest rate, and will accumulate debt for any new purchase made. It is not possible to pay off new purchases until the old balance is cleared, which is potentially risky. Balance transfer is bound to decrease the credit scores, since new credit line is accountable for 10% of the total scores. After the zero-interest period is over, any new purchase made is charged the same high interest rate, so the card must be used even more carefully. Balance transfer is an attractive scheme, only if the card is used to pay off the debt in time. It does not give the freedom of using the credit card for any other purchase, since the amount will start accumulating interest rates, right from the first month. Also, closing the old credit card after the balance transfer scheme may further decrease the credit scores, since it reduces the credit to debt ratio. Balance transfer ironically charges a fee for the process, even if its for debt relief.