Balance transfer can be a tricky debt consolidation method. It is effective, but you need to approach it with a plan in mind. There are many benefits to be gained from this debt relief option but only if you approach it correctly.
First of all, this is ideal for credit card debt but it can also work for car loans, appliance loans and other personal debts. As the names debt consolidation and balance transfer suggest, you will consolidate your debt by transferring your current balance into one credit card. The beauty about this method is that balance transfer cards usually have a zero interest introductory period. This period is at least 6 months and can go as long as a year. That means, you get to enjoy paying off only the principal amount of your debt. It allows you to make significant payments towards your debt so that when the interest rate kicks in, it will not be as great as it should be.
Of course, there is a certain fee involved. There is a balance transfer fee that will depend on the debt amount that you will shift towards the new card. It is usually 3% of the amount that will be shifted. You need to pay this off on top of the principal amount of your debt. Make sure that you compute if this will end up giving you savings. If not, then you may want to reconsider this as your debt relief option. Or, you can choose another card that has a better deal in terms of your debts.
The technique with balance transfer is to take advantage of the introductory period. Before you decide to transfer, you have to come up with a payment plan that will help you put in the maximum amount into your debt payments – at least for this particular period. Once the introductory zero interest period expires, you may be faced with a high interest rate again – sometimes it can even be higher than your old rates.
A frugal budget is the best tool that you can use for this type of debt solution. The budget that we are talking about is the type that will only have room for the barest of your basic necessities. The extreme restriction that a frugal budget will put you through will only be on a short term so you should be able to convince yourself to survive it. The rewards of that will be a huge chunk off of your current balance when the zero interest expires and the high rates start to take effect.
You should also remember that any new purchase that you will make from the balance transfer card may not be given the zero interest promo – even if you are still within the promo period. It is oftentimes strictly for transferred debt only.
As you transfer your balance, make sure you either close or stop using your old credit cards. Remember that you are not really solving your debt problems. You merely shifted it so that your debt payment will be more manageable. If you want a lower monthly contribution, balance transfer may not be ideal because here, you need to put in the highest amount on your debt payments – at least for the first 6 months. If you cannot afford that, then you may be better off with debt management or debt settlement.