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In the simplest terms, a balance transfer is when you can repay the debt on one credit card with another as a result of which your existing balance will be transferred to the new credit card. Although it leads one to question why such a transaction would be necessary, it should be understood that there are several benefits involved. Balance transfer credit cards are offered by card issuers as a marketing strategy to attract customers of other credit cards. As a result, the balance transfer credit card almost always has a friendlier deal than the existing card. Here are some of the benefits of a balance transfer.
Introductory rate during the introductory period
A majority of the balance transfer cards will offer you a lower introductory rate in the promotional period. Some balance transfer credit cards even offer 0% APR on the balance during the initial period which could be anywhere between 6 months and 18 months or even more, depending on your credit history. If you have a sizeable debt of around $1000 or more and your existing credit card charges in excess of 15% APR, you will save a lot of money in terms of interest paid, by going for a balance transfer.
Added credit limit
Your credit rating depends on your credit utilization ratio which is the ratio of your credit card debt to your credit limit. If the ratio is lower, then your credit rating would be higher. The new balance transfer credit card, will add to your credit limit without adding to the debt. This will lower your credit utilization and therefore enhance your credit rating.
Chance to shift to another card with better terms
If you have been tricked into using a credit card with unfavorable terms like higher APR or lower credit limit, the balance transfer will allow you to shift to another credit card, with some added incentives. Moreover, if you keep your old card account alive, you can benefit from the extended credit history as well. Based on your history with the older credit card, you can always expect more rewards, especially if you have developed a good credit rating. The balance transfer will allow you to shift to a card which could offer better rewards that suit you, lower interest rates or higher credit limits. Sometimes credit cards can increase the interest rate on your existing card. As per the new credit card rules you have no obligation to accept the increased interest rate. You can clear the existing debt and move on to another card. Balance transfers will be helpful even in such cases.
Added motivation to pay off debt
Balance transfers usually come with an introductory period of lower or 0% APR. This provides you added motivation to repay off your debt within the introductory period. Once the promotional period is over, interests will be charged on your principal. Hence, without the interest in the initial period you will have a good idea of how much to pay per month to get rid of the debt.