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Balance Transfers: Understanding the Game

Is your holiday spending finally catching up with you? You spent a bit more than you planned to on your store credit card and your no-interest pay period is coming due on the couch you bought last September. You may feel a bit strapped: however, there may be a way to get around it without getting stuck paying high interest on your credit card. Transfer your high-rate balances to a low rate card.

How does balance transfer work?

A balance transfer occurs when you take the existing balance from one line of credit and put it on another line of credit. In doing this, your previous card shows a zero balance. All credit used then appears on your new card.

But doesn’t that just shift the problem?

Not exactly. There are plenty of credit cards that can do a balance transfer for no additional fee. Just make sure you find one that has that. Couple that with a card that has low or no interest for several months, and you can give yourself more time to pay it down while enjoying a lower interest rate. 

What does it mean?

Once you’ve transferred your balance to your new card with deferred interest, you can start making monthly payments without the high interest charge. It’s a simple way to take some of the pressure off. 

How long can I do this for?

That depends on the offer. New cards offers generally provide the longest promotional terms, usually from 12 to 21 months. Keep in mind opening a new card will impact your credit and there is no guarantee that you will get a credit limit to cover your full balance transfer. Another option is to consider transferring your balance to an existing card using a balance transfer offer on your existing card. The promotional period is typically shorter on these offers, 6 to 12 months. Additionally, there may be a balance transfer fee on some cards, so it is important to keep this in mind.

How do you choose?

Avoid the game of transferring balances from one card to another card simply to postpone paying the balance. Consider all of your options and how they might impact your credit score. Promotional rates come to an end, so opening too many cards may not only impact your credit, but they may leave you with a higher interest rate. 

Use tools, such as Orlando Credit Union's Money Management, to help you determine the best course of action in paying off your debt. These tools can show you the impact of making higher payment amounts and help you determine a plan to pay off your debt using the snowball effect, a method whereby you pay smaller debts first in order to see progress, or to pay off your higher interest rates first. You can even try out different scenarios to see what works best for you.