Before we go into what can go wrong with balance transfers, we need to first understand what balance transfers are all about. Balance transfers work on the principle of transferring all the outstanding balance on a current credit card onto a new credit card. This is done in order to avoid the high prevailing interest rates of your current credit card, by taking advantage of the zero percent interest rates offered by the new credit card as an introductory offer.
There are a number of things that can go wrong with balance transfers. With the advent of the global economic crisis, a lot of people are finding that balance transfers are their only way out of the vicious cycle of debt. But if you start taking out balance transfer cards without thinking about the consequences, you might be in for a big surprise.
Before you open a new credit account, you need to first calculate how much you are spending on your current credit card. Let`s take an example as a case study. If you had $10000 outstanding in a credit account and it is charging you 20% as interest rate, you will have to pay $2000 every year as interest. Now, you need to find an option that will let you pay less than $2000 every year.
If you go for a balance transfer, you will have six months to two years to pay back the outstanding debt. During this period, you will not pay any sort of interest on the amount that you have borrowed. However, you will have to pay a certain fee to make the initial transfer. This fee can range between 5 to 10 percent of the outstanding amount. Sometimes you will have to pay a flat rate of $50 to $100, this is much better if you are transferring a larger amount. You will also have to pay an annual fee since it is a zero percent credit card. You need to calculate to see if these charges taken in total, will amount to much more than what you are already paying. You also need to realize that whatever outstanding balance remains after the introductory period, you will be charged interest. Before you open the account, you need to find out what this interest rate is going to be. If you fail to take these precautions, you can be in for a surprise when you open the account.
Apart from all this, the fact that your credit score will improve when you start making regular payments towards the clearance of your debt, has to be taken into account. Savings are just one aspect, apart from this it is very true that you get more time to repay your debt. You can consolidate your finances, and if necessary sell some assets to be able to pay off your debts. It is important to be aware that you will have to pay some sort of minimum amount at the beginning, to clear a portion of the outstanding debt before you can get the balance transferred.