Pros and cons of a balance transfer
That credit card debt you’ve managed to pile up is about to get more expensive.
The Federal Reserve is poised to raise its benchmark interest rate twice more in 2017. That means the interest rate you pay every month on your credit card debt could increase by half a percentage point before the year is out.
It may be time for you to shield yourself from the impacts of a rate hike by applying for a balance transfer credit card.
A credit card offer that features a low- or 0 percent-interest introductory period on debt transferred from another credit card can be an efficient way to vanquish a large credit card balance over time without shelling out any (or very little) interest. It’s also the only practical way to pay off one credit card with another. Credit card companies won’t allow you to directly use a credit card to make a monthly payment.
Who should (and shouldn’t) get one?
These cards are typically designed for and offered to individuals with good to excellent credit. You may not qualify if your credit isn’t in tip-top shape. If you have damaged credit, a personal loan might be a better option, particularly if you can find a fixed-rate offer that is lower than your credit card’s annual percentage rate.
Balance transfer cards are ideal for individuals struggling to pay off the principal of their credit card debt due to high monthly interest payments. With balance transfer cards, you can make one low-rate monthly credit card payment instead of several.
“If you can really keep yourself on a budget ... (a balance transfer credit card) can be a useful tool” for paying down debts, says Thomas Nitzsche, a certified credit counselor and communications lead at Money Management International, a Sugar Land, Texas-based nonprofit credit counseling agency.
But if you’re simply transferring balances from card to card, the new one won’t eliminate your debt woes. In fact, you could wind up exacerbating them because balance transfers often involve fees and could carry high go-to interest rates once the introductory period is over.
“You have to do a balance transfer for the right reasons,” says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax. “To do it to tread water for another 12 months before sinking is not worth it. To tread water while aggressively paying down your debt in 12 months — that’s the right strategy.”
Tips on balance transfer cards
Before jumping at an offer, read the fine print and calculate the costs. The key figures are the: • Introductory interest rate. • Annual percentage rate (APR) after the intro rate. • Balance transfer fee. • Minimum monthly payment.
Under federal law, the teaser rate must last at least six months. Many balance transfer credit cards will offer introductory rates for longer periods, anywhere from 9 to 18 months or sometimes even longer, Nitzsche says.
Use a credit card balance transfer calculator to figure out if you’ll be able to pay off the balance in full before the promotional period ends. Otherwise, you may end up paying a much higher rate on your credit balance.
In addition, stay away from using the card for further purchases while paying off the balance. It’s important to steadily reduce your credit card balance on a monthly basis.
Don’t forget to add in the cost of the balance transfer fee, which is typically around 3 percent of the balance. Also factor in what the new card’s minimum monthly payment will be; often, it’s a percentage of the balance transfer.
Can I qualify?
Even if all the numbers pan out in favor of a balance transfer, you still have to qualify. That means you should have a good idea of what your credit looks like before applying.
Those with stellar credit (750 or above) will likely qualify for the best teaser rates. If your credit score falls below that, you may get a higher teaser rate, but it still may be lower than what you’re paying now.
“You have to set your expectations within the realm of reality,” says Bruce McClary, vice president of public relations and external affairs with the National Foundation for Credit Counseling.
The other factor is the credit limit. There’s always a chance the new issuer won’t dole out a large enough credit line for you to transfer your entire balance, says Linda Sherry, director of national priorities at watchdog group Consumer Action.
Check the fine print to see if there is a cap on the balance transfer amount. Otherwise, you may not find out if your new account will be able to swallow your balance until after the account is opened, Sherry says. Then you’ll have two credit cards you need to pay off.
Living with a transfer
You qualified for the balance transfer and moved your debt to a no-interest account. Now what?
Make sure the old card has been paid off by getting a statement from your old issuer. Sherry recommends keeping the old card open, charging very little each month (such as gas) and paying off the balance in full. That will help boost your credit score while you pay down your debt. If a balance still remains on the old card, continue to make payments on time.
Meanwhile, attack the balance transfer debt before the introductory period is up. And make sure every payment gets in on time. Otherwise, the intro rate could disappear. People who don’t utilize these best practices risk digging a deeper hole for themselves.
“They’ve just doubled the amount of debt they are dealing with in a short amount of time and then the debt becomes unmanageable,” McClary says. “Hold your feet to the fire when it comes to paying down that balance so you don’t get burned later."