Cleaning your Subscriptions

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How to Use a Balance Transfer to Increase Cashflow

A balance transfer is a transaction where debt is moved from one credit card account to another account. For people paying off high-interest credit cards, a move can save you a lot of money on interest charges. You can use a balance transfer to move ...

A balance transfer is a transaction where debt is moved from one credit card account to another account. For people paying off high-interest credit cards, a move can save you a lot of money on interest charges. You can use a balance transfer to move your high-interest credit card balance to an account with a lower interest rate and reduce your interest charges. It can also increase your cash flow if you choose to reduce your payments. 

Balance transfers can be a great financial tool when done properly. They can save you money that would have been used to pay interest on your debt, help you earn credit card rewards, and help you pay off your debt faster. It is important to make sure that you understand them first and do them correctly. 

Benefits of a balance transfer

Transferring your balance from one credit card with a high-interest rate to a lower interest credit card can reduce the amount of money that you are accruing in interest. Stopping the high-interest charges will free up some of your cash flow. 

Some of the additional benefits of balance transfers include the following.

    1. Take advantage of better interest rates. 
    2. Move your balance to a card with better terms. 
    3. Increase cash flow.
    4. Consolidate credit card debt. 
    5. Eliminate the hassle of making multiple credit card payments. 

Balance transfer examples of savings

Let's assume you have $8,500 in credit card debt. Your annual percentage rate (APR) is 18%. If you can make a $300 monthly payment on the debt, you will end up paying $2,637.82 in interest and it will take you 37 months to pay off. 

If you use a balance transfer and switch to a credit card with a 0% introductory APR, you will pay off that balance in 19 months. The interest payments will only be $1,237.04.  You will incur a balance transfer fee of about $255, but that is far less than you would have paid in interest if you had kept the balance on the old credit card. Your total balance transfer savings is $1,400.78.

If you would like to increase cash flow with the balance transfer, you can reduce your monthly payment with a lower interest rate. For example, if you have $20,000 in debt at 20.9% interest, your monthly payment is $550. If you do a balance transfer to a credit card with 9.90% interest, your monthly payment is reduced to $366. You will have a potential reduction in monthly payments of $184. 

When to do a balance transfer

 A balance transfer should be used when you are working on getting out of debt or need to increase your cash flow. Some credit cards come with an introductory 0% APR to encourage people to transfer their balances. This is ideal because the money that you put toward your debt will not be accruing interest, but will be paying off the principal balance. 

If you need to increase your cash flow to pay for unexpected expenses, a balance transfer may come in handy as well. You can reduce the amount of money that you pay monthly on credit card interest and put that towards something else. 

Balance transfers do come with costs and limitations. You may have to pay a balance transfer fee, which is typically about 3-5% of the total amount transferred. Also, if the card that you are transferring the balance to has a low limit, you may not be able to transfer the whole balance. 

Steps to do a balance transfer

When doing a balance transfer, you will want to do a bit of research before getting started on the process. You don't want to be hit with unexpected charges in the process of lowering your monthly credit card payments. 

    1. Select a balance transfer card that fits your needs. Look for one that has a low Intro APR, a long enough period to pay off the balance, and possibly some rewards. 
    2. Read and understand the terms and conditions of the credit card including any fees that are associated with a balance transfer. 
    3. Apply for the credit card. You may not qualify for every credit card out there. The application step is essential. 
    4. Once the new credit card approves your account, contact them to do the balance transfer. You can do this over the phone or online. You simply need the account numbers and the amount that you would like transferred. 
    5. Begin to pay off your balance. 

A balance transfer can help you to get out of debt faster and reduce the amount of interest that you end up paying to the credit card company. Balance transfers should not be used to simply lower your payments for a few months. While it can be tempting to jump into a balance transfer to eliminate your debt faster, the numbers don't always work out in your favor. Remember to factor in the transfer fees and new interest rate when deciding to use a balance transfer. 

If you’re looking for better ways to manage your cashflow, Thinkflow offers the cashflow app and additional income opportunities.

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