How Transferring Credit Card Balances or a Consolidation Loan Can Save You Money
- 10th April 2018
- Posted by: Loanable
- Category: Resources
If you are like many of us, your bank has sent you notices over the years stating if you transfer a credit card balance from another account to the credit card you have with them, they will reduce the interest to 0% for 20 months, or (insert time frame here)
That means no interest will be paid/charged on the account for the next 20 months.
It sounds like a pretty good deal if you have other credit cards with a balance on them, especially if they are high interest rate cards.
Even if the credit cards or other loans you have are on low APR’s or interest rates, nothing is lower than 0%.
Once you know and realise how long it takes to pay off a credit card due to the high interest rates some charge, you can see why 0% not only looks good, it feels good, too.
If you have a £500 balance on a credit card, and the interest rate is 29%, which is high, but many cards do charge these high rates, and you only make the minimum monthly payment, which is 3% of the balance, or £15 a month, it will take you 233 months, or over 19 years to pay back the £500.
By paying an extra £10 a month, you can cut that payback time to just 40 months, or just over three years. Pay an extra £25 each month, and you cut the payback time to 18 months, saving you just over £1,252 in interest.
That’s a huge savings, and it is easy to see why balance transfers being offered at 0% are very enticing.
The Fine Details
Of course as with everything, there is the small print, or fine details with balance transfers.
Some of these details can be:
- Fees: What fees are involved in transferring the balance. One bank stated a fee of 2.9% or the balance transferred, or a minimum of £5 was the fee involved. This means if you transfer a balance of £2,000 from one credit card to the zero balance card, you will be charged, £58, so your new zero interest account will show a balance of £2,058.
- Credit Limit: You will only be able to do the balance transfer if the credit card offering the zero % interest rate has a credit limit high enough to cover the amount transferred. If you are transferring a balance of £2,000 to an account with a £3,000 credit limit, and you only have £500 on that account, you will be fine.
- New Purchases: In many instances the 0% interest rate offering is only on balance transfers, not on any new purchases made on the card. So if you transfer £2,000 to a zero % card, you get zero % on the amount transferred, not any new purchases you may make on that account.In addition, the bank or credit card company may not only charge you the usual interest rate on any new purchases, but take any payments you make to be put toward those purchases first, before applying any payment to the transferred balance.
- Time: How long is the zero or low interest rate for? It will be a set or fixed time, maybe 12 months, or 24 months, and then the interest rate on any remaining balance will revert back to the usual rate.
These are all things you need to know and keep in mind when researching a credit card balance transfer.
Will A Balance Transfer Work For You
In order for a balance transfer to work for you, you need to look at three things closely:
- Time Frame
- How Much Extra Can You Afford to Pay
In reviewing the fees involved, you may find that the interest you would pay on the current credit card works out to be less than the fees should you transfer the balance.
So it is in your interest (pun intended) to not make the transfer.
Then in looking at how long the offer is extended, 12 months or longer, how much extra can you afford to pay each month towards the account.
Having 0% on a credit card is great, but not if you don’t pay more towards it to pay off the balance.
You need to calculate as to if you can pay off the balance in that time period. In this easy example we will say you transfer a balance of £1,200 to a 0% card, and can afford to pay £100 each month during the 12 months the low interest rate is being offered. This means you will pay off the balance within that time frame.
At 0% interest, you are just paying back the account balance and no interest each month.
Using a 0% balance transfer offer to reduce and/or pay off a high interest rate credit card can be a good option to get out of debt.
However, you do need to know all the details involved, and also do a bit of math to see if the deal is as good as it seems, and if it will work for you.
One other way to pay down and pay off credit card balances is through a consolidation loan.
Consolidation loans are personal loans that are granted to pay off, or consolidate two or more credit cards.
In most instances the new loan can have a lower interest rate than the credit cards, and better terms of repayment, which reduces the overall monthly payment(s) to the credit cards.
An example may be someone has three (3) credit cards, with interest rates ranging from 19.9% to 26%, and in total they have balances of £1,000, £3,000, and £5,000.
So in total they have £9,000 in credit card debt, with an average total monthly payment of £250 to £270 a month for all three cards.
As we have seen in reviewing transferring credit card balances, by just making the minimum monthly payments on these three credit cards, it will take many years to pay them off.
If someone takes out a consolidation loan for £9,000 and pays off the credit cards, they can get a better interest rate and better terms, which allow them to have a set time-period to pay off the loan and be out of debt.
Depending on the interest rate and term, they may get payments less than what they are paying currently, and if they want to get the accounts paid sooner, they may be able to reduce the term and only be paying £20 more a month, but be debt free in three (3) years.
Will a Consolidation Loan Work For You?
There are two main points to keep in mind when considering a debt consolidation loan, and one is if it is helping you financially. And this does not necessarily mean the loan is reducing your monthly payments, although for many that is a huge consideration.
However, is the consolidation loan giving you a light at the end of the tunnel; meaning you can see a time when you will be debt free.
In addition, if you do not make changes to your spending habits that brought you to the point of considering or needing a consolidation loan, the loan will not be a cure, but just a temporary fix.
If you continue to use the credit cards and run up balances, you will then have those to pay, in addition to the new consolidation loan.
Your Credit Score and Balance Transfers and Consolidation Loans
In many instances the transferring of balances on credit cards and consolidating credit cards can help your credit score. This can be due to having your balance-to-limit ratio decreased.
For consolidation loans, your credit report may only show one (1) loan and the credit cards having zero balances.
For balance transfers, depending on the credit limits you have this can work the same.
You also need to remember when you apply for a new credit card, or loan, an inquiry, or footprint is placed on your credit file. Too many of these can reduce your credit score, but only for a short-time.
Again, when either doing a balance transfer or a consolidation loan, it is important to not use the credit cards you have paid off, or transferred balances from, and to not continue using the new credit card you transferred the balances to.
Continued use of the cards makes it more difficult to pay them off and get out of debt.