Balance Transfer: What You Need to Know

Many entrepreneurs rely heavily on credit cards to meet their financial needs. They are easy to use and offer additional benefits. But using credit cards also has certain drawbacks. If you don't use them wisely, you could rack up unmanageable debt.

If you are unfortunate enough to be managing a significant credit card debt, then a balance transfer could be a good solution for you. Let's look at what balance transfer is, how it works, and determine if it's right for you.

What is a Balance Transfer?

A balance transfer is a method of moving debt from one credit card to another. It can help you save money by reducing the cost of your interest.

Fewer penalties and fees: Your new credit card could offer fewer fees and cheaper annual fees.
More rewards: The new card will leave you qualified for travel benefits, gift cards, or money.

No Interest Charged on Balance Transfer - Difficult to believe, though true. Your card balance will not be subject to interest for 6 to 21 months from the transfer date. Most credit card companies offer promotions to bring in new customers. This particular benefit will help you save a lot of money.

Remember that balance transfer refers to moving debt from one credit card to another. However, this is not the only solution for high cost and difficult to manage credit card debt. You can also pay off your cards with a debt consolidation loan.

In the same way, it is possible to pay your debt with certain business loans. Of course, these types of loans are only available to pay off business debts. You cannot use them to pay off your personal debts.

How Balance Transfer Works

It is important to know that a balance transfer will not eliminate your debt. You will only be transferring your debt to a new credit card. The real goal of a balance transfer is to lower the cost of your debt. To more easily understand how a balance transfer works and its impact on your interest cost, let's look at an example:

Imagine you owe $20,000, and your card has an interest rate of 17% per year. If you want to pay the balance in 12 months, how much would you pay each month? You would have to make a payment of $ 1,824.10 per month. Now imagine the same debt and the same number of payments, but with a lower interest rate of 12%. The monthly payment would be $ 1,776.98. With this rate, you would be saving $ 565.

By transferring your balance from a card that charges an interest rate of 17% per year to one with a rate of 12%, you would be saving a lot of money. You can analyze and calculate how much you would save with different interest rates and different debt sizes with a payment calculator.

Is Balance Transfer Good?

When used correctly, transferring your card balance can help regulate your debt and make it more manageable. Plus, it instils some discipline to your company's finances. But a balance transfer could also hurt you.
Remember that there are other things you should take into account:

The new card may impose fees for transferring the balance. For example, a 2% fee on an outstanding credit of $ 20,000 amounts to $ 400. This could substantially reduce the amount of money you saved with a lower interest rate.

Or perhaps, when you transfer your debt to a new card, and your current card limit becomes available again, you might be tempted to use this restored credit, which will increase your debt.

So, should you do a balance transfer?

Carefully weigh the benefits and get a new card only if you are sure it will help you save money and reduce your overall debt.