Question

10)You have a few credit cards that you are currently paying the minimum payment on, which have high interest rates. You cannot pay it all off before the end of the month and as a result have only been paying the minimum. Recently you receive an offer for 0% balance transfer and think it is a good idea to transfer your balances from the various different cards in order to pay it off faster without any more interest or finance charges incurred.

10a) Explain how credit card companies make money on balance transfers.

10b) Explain how you would use a balance transfer correctly and “win in the balance transfer game”.

Answer 1

10a) Credit card companies have several money-making reasons for offering customers with balance transfer from a competitor’s card and pay no interest on that balance. “Credit card companies offer 0% financing as a way to entice you to apply for their credit card,”. Then they earn from the 3% interchange fees that retailers pay on every purchase that a consumer charges to a credit card, from balance-transfer fees, and from customers who don’t pay off the balance before the introductory period ends. “In most businesses, the cost of acquiring a new customer is high. Credit card companies are willing to pay that cost through advertising their 0% cards and then allowing you the free use of credit for a limited time," While the balance under a 0% transfer offer won’t accrue interest during the set period as long as every minimum payment is on time, credit card companies usually charge consumers for transferring the balance from the old card to the new card. The credit card's annual fee, if it has one, is another opportunity for the card issuer to make money when a balance is transferred to a new card.Transferring a balance to get a 0% introductory rate for 12 months doesn't mean just forgetting about the balance. The cardholder has to make minimum payments before the due date every month or they lose the 0% rate and might have to pay a late fee. Losing the 0% rate means the cardholder will start paying interest on the transferred balance at the penalty rate unless the card comes with a no-penalty APR.

10b) If you transfer balances from multiple credit cards to one balance transfer card, this can streamline your payments into one easier-to-manage payment. If you want to utilize benefit of balance transfer you must commit to getting out of debt for it to be a beneficial move, otherwise there is a risk ending up in even more debt. Here’s how to transfer credit card balances to help you pay off debt. Review your credit card balances and interest rates.Your credit card interest rates are typically expressed as an annual percentage rate (APR). You need know APR of balance transfer to avoid ending up paying extra. Eventually, you want to find a balance transfer card that can accept the amount you want to transfer and has a lower interest rate than your existing debt.When choosing a balance transfer card, consider APR, the length of the promotional low-APR period and any fees. These factors could be your master stroke when it comes to paying down your debt. It’s crucial that you read the terms and conditions, before going through with balance transfer.That way you can save money on interest, pay off debt faster and utilize a balance transfer to your advantage.