A balance transfer happens when you move your debt
from one or more sources to a single credit card with a lower interest rate. By
paying less interest, more of your payment goes toward the principal balance.
Balance transfers aren’t always the best way to get debt relief, however. You should carefully consider the benefits and downsides to balance transfers before initiating the process.
How a Balance Transfer Works
With a balance transfer, you transition the amount you owe from one card
to another. You can also move other types of debt to a credit card. For
example, some issuers may allow the transfer of auto and personal loans.
Here are the five steps to completing
a balance transfer.
1. Choose a
balance transfer card: You can either open a new credit card for the transfer or
transition your debt to a card you already have. Look at interest rates,
balance transfer fees and other terms to make the best choice.
2. Decide on
your transfer amount: Look at the credit limit you have and ensure the balance
will be less than your limit. Ideally, the transfer is much lower than your
credit limit and lowers your credit utilization ratio in the process.
You’ll also want to look at balance transfer fees,
which are usually around three percent of the amount you’re transferring. Some
cards also have limits on transfer balance amounts. Check your card details
3. Review the
terms and conditions: Make sure you’ve read all of the terms, fees and official
agreements before transferring the balance. While the fine print can be
lengthy, you need to know exactly what it is you’re agreeing to.
4. Initiate the transfer: There are a few different ways you can initiate a transfer—through your credit card’s online account, or calling the customer service line of your credit card company, for example—but how you do so will depend on the policies of your credit card company.
5. Pay off your debt: Make monthly payments toward your balance transfer. Create a plan to pay your debt off within the introductory period, so you don’t have to pay any interest on it.
How a Balance Transfer Affects Credit Score
Balance transfers can either improve or lower your
credit score, depending on multiple factors. Here’s how:
Your credit utilization rate: If you’re able to pay off more of your debt due to the lower
interest rate, your credit score will improve. By paying off debt, you’re using
less of your available credit, which lowers your credit utilization ratio.
payments: Paying your credit card bill on time boosts your credit
score, as payment history is the most significant factor in scoring models like
transfers can help in this area if the transfer makes it easier to pay.
Number of hard
Your credit score takes a hit when you apply for several credit cards at once
because they each trigger a hard inquiry.
Hard inquiries aren’t bad in and of themselves and are a necessary part of applying for credit. That being said, if you have a large number of hard inquiries on your credit report within a short time frame—if you apply for many credit cards at once, for example—it signals to lenders that you may not be responsible with your credit.
Average age of credit: Your credit score is also based on the average age of your credit. It would be more beneficial to your credit to keep your old accounts open even after you’ve transferred the balance. This will increase the average age of your credit accounts. More open cards also help keep your credit utilization rate low.
When to Consider a Balance Transfer
A balance transfer can help you pay off debt faster
and pay less overall. Here are the main scenarios when a balance transfer can
You have debt with a high-interest rate: If you have a credit card—or many cards—with high-interest rates, it may be good to transfer the balance to a card with a lower rate. By lowering interest, you’re able to pay more toward the principal balance and pay off debt faster.
to juggle multiple payments: You can combine debts by transferring them all to a single
card, which will allow you to only have to keep track of one payment every pay
You can get a good promotional offer: Many credit cards offer low or no interest rates during the introductory period (usually six – 18 months). By transferring your debt, you can save money in the long run.
How to Choose the Best Balance Transfer Card
Balance transfer credit cards compete with other
credit cards by offering good introductory APRs (annual percentage rates) to
attract new cardholders. Generally, the better your credit, the more options
you have for low introductory rates and no transfer fees.
Here are a few other things to consider when shopping
transfer fee: A fee for transferring a balance is common. It’s usually about three
percent of the balance amount (like we stated above). If you have a good credit
score, it’s possible that the balance transfer fee might be waived entirely.
Interest rate: Interest rates vary
significantly between cards. Some promotional incentives may offer introductory
zero percent APR. However, be sure to look at what the APR is after the
introductory period, in case you don’t pay off all your debt in that timeframe.
promotional period: The introductory promotional period for balance transfers is
usually six – 18 months. A longer promotional period allows you more time to
pay off the debt before a higher interest rate is applied.
Annual fee: Some cards charge a fee each
year to keep the card active. Be on the watch for high annual fees.
Credit limit on
a new card: A
higher credit limit can help you maintain a lower credit utilization rate. If
you’re transferring a balance, make sure your credit card limit far exceeds the
balance you’re transferring.
Basic requirements: It’s best to apply for a card that you have a good chance of being approved for. When you apply for a credit card and aren’t approved, the hard inquiry will remain on your credit report. As we said above, too many hard inquiries occurring in a short time period can lower your credit score.
Generally, if the amount you save with a lower interest rate is higher than the balance transfer fee, it may be worth transferring the balance. It’s also ideal if you can pay off the balance during the zero percent interest period, and avoid paying interest on any of your debt.
What to Do After You’ve Transferred Your Balance
After you’ve transferred your balance, there are a few
things you can do to improve your credit score and pay off your debt.
On-time payments boost your credit score. Any late or insufficient payments can
potentially invalidate lower interest rates and harm your credit score.
reminders for when the introductory period ends. Any debt you don’t pay off
during that period will be charged with greater interest rates. You’ll also
want to make sure you complete the transfer within the given timeframe.
Create a plan
to pay off debt within the zero percent timeframe: Design a budget that works for you to
pay off your debt, ideally within the zero percent interest timeframe. This
might include scaling back on expenses or picking up extra shifts at work. In
the long run, it could save you quite a bit.
Don’t make purchases on your new card: When you make a payment, the funds go to your purchases first, then your transfer balance. Try to use a different method of payment to make purchases, so your credit card payments only go toward your older debt.
Keep your old cards open: By keeping other cards open, your total available credit limit is higher—meaning your utilization ratio is lower. Having older cards also increases the average age of your credit accounts.
Why You Should Check Your Credit Report After a
Mistakes sometimes happen when there is a lot of
activity on your credit report, such as data errors and information that should
no longer be on your report.
These inaccuracies can unfairly affect your credit score.
For example, some of your credit reports might not reflect the balance transfer
properly. Credit repair can help you review your
report, identify errors, and work to correct—giving your credit score a boost.
Contact the credit repair consultants at Lexington Law to learn how we can help
Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?
While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.
Users Who Are Authorized
An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.
If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.
Joint Credit Cards Have an Impact on Your Credit Score
Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.
Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.
While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.
Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.
Should you pay down debt or save for retirement?
While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.
Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.
If you have high-interest debt, pay it down
When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).
In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.
High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.
To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.
If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.
Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.
If you’re nearing retirement, start to save
The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).
Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.
Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.
Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.
Aim for both goals by improving income
As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.
The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.
If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.
For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.
While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).
How does a loan default affect my credit?
Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.
Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.
30 days late
Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.
The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.
More than 30 days late
Payments that are more than 30 days past due can trigger increasingly serious consequences:
- The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
- You may receive phone calls and letters from creditors demanding payment.
- If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.
Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.
Other ways a default can hurt you
Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:
- If you default on a car loan, the creditor can repossess your car.
- If you default on a mortgage, you could be forced to foreclose on your home.
- In some cases, you could be sued for payment and have a court judgment entered against you.
- You could face bankruptcy.
Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.
How to avoid a loan default
Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:
- For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
- For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.
Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.
Clean up your credit
The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.
Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.
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