Understand Balance Transfer Vs Purchase Before You Buy
by Erica Sandberg / 0 Comments / Mar 21, 2015
You need to understand the lingo of balance transfer vs purchase. You’ve got a credit card loaded down with a big balance that you can’t repay quickly. Worse, the interest rate is staggeringly high, so each time you make a payment, a substantial portion of it goes to the finance fees. How frustrating. You’re doing the right thing – or the best that you can, anyway – but the principal is barely budging.
A balance transfer can come to the rescue. By shifting the debt from the expensive creditor to one that will charge considerably less, you can save your hard-earned money and get out of debt far faster.
Balance transfers done right are fabulous, but they can go awry. Here’s how to make sure the deal stays a deal.
- Know the initial outlay or balance transfer vs purchase.
As you may be aware, there is a cost involved right from the get-go. The new creditor will charge a fee of between two to four percent of the sum they absorb. That means that a $5,000 debt will increase by $150, assuming a 3 percent transfer fee is tacked on. Is it worth the price? Definitely! The total finance charges would be about $1,200 for that hypothetical $5,000 debt (with an APR of 29 percent) if you were to delete it in 18 months. Move it to a zero percent APR, 18-month balance transfer card, then pay it off in that time-frame, and all you’ll be out is initial fee. You’d save a very sweet grand. - Pay on time.
To be sure that all goes acceding to plan, you must be diligent. In almost all cases, that ultra low promotional rate will skyrocket if you were to pay a moment after you’re supposed to. Know your due date and stick to it. Don’t and the new rate can be at least as bad as the one you just escaped, meaning that balance transfer vs purchase does matter as each costs you a lot of money. - Be careful with other accounts.
If you pay according to the contract, your interest rate dur-ing the promotional period should remain steady, but pay attention to what happens after it lapses. The account will go up to a normal rate, but the issuer can usually raise it more if you use it the wrong way. Besides missing the due date on a bill, issuers reserve the right to hike the rate if your balance on this – or any other card – goes too high. - Don’t expect new charges to have the same low rate.
But back to that balance transfer. Odds are that you’ll also use the new card for purchases. Will you get the zero percent APR on those too? Not necessarily. Depending on the terms of the contract, just your transferred balances would get the deal. What you buy will collect interest at the non-promotional rate.
And finally there’s the original credit card. It’s just sitting there, with nothing on it. It’s so tempting to grab it and start charging again when cash is tight. Drop it. I’ve seen too many people descend right back into debt again this way, and when they do, they owe to a costly card as well as to the one with a low rate that will soon expire. Balance transfer vs purchase: is a balance transfer good or bad? It all depends on how you treat them.
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