How Do Balance Transfer Credit Cards Work?
UNDERSTANDING WHAT A BALANCE TRANSFER CREDIT CARD IS:
Such a credit card that allows you to transfer amounts from other accounts is a balance transfer credit card. The majority of the time, balance transfer credit cards provide users an initial 0% APR, or no interest, on their outstanding balance for a certain period which is usually somewhere between a year and 21 months. This allows you the chance to settle your debt without having to pay any interest.
Despite the fact that it may be a useful way to handle credit card repayments, there are a few things to think about before choosing to get a balance transfer credit card.
Pros of a balance transfer credit card:
0% interest rate:
Although it's possible to transfer balances across the majority of credit cards, it's crucial to choose one with a 0% interest for balance transfers if you want to repay your debt more quickly. Users can avoid interest payments for up to 21 months if they use the correct balance transfer credit card. In this way, you can save a significant amount of money while reducing your debt.
Also Checkout Best Balance Transfer Credit Cards In India
Helps in boosting your credit rating:
If you combine your debts onto one new card and take steps to lower your loan levels, your credit score might improve. It is a wonderful strategy to raise your credit score when you request a new credit card with the intention of transferring a balance because it raises the amount of credit that is readily accessible in your name and ultimately lowers your credit utilization ratio.
Payoff debt quicker:
Balance transfer credit cards might be of great assistance if you have an unpaid balance on one or several of your credit cards. Each rupee of your payments goes directly toward your principal amount every month, with no interest charged. As a result, you may pay off debt more quickly and with less difficulty.
Cons of a balance transfer credit card:
Not repaying the debt fast enough:
If you fail to pay off your debt during the interim 0% interest time frame, your interest repayments may increase. These might even be more expensive than the interest you were paying prior to getting the balance transfer card.
May result in an increase in the Credit Utilization Ratio:
Your credit score is heavily influenced by your credit utilization ratio, which compares your outstanding debt to your credit limit. Your credit utilization will skyrocket if you move several balances on one credit card while simultaneously using the credit limit that was released from the other cards. This will reduce your credit score.
Hard inquiry:
Hard inquiry or, as commonly known, a hard pull is when you request a new credit line, like a loan or credit card. Hard inquiry denotes that a lender has asked to review your credit report in order to assess the risk you represent to lenders in terms of borrowing. Your credit score may be impacted by hard inquiries, which are recorded on your credit report.
BOTTOM LINE:
Additional Reading: Difference Between Cashback vs Reward Points In Credit Cards
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