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When I started the process of paying off my debt, transferring my credit card balances to lower interest cards really helped. This tool can be a lifesaver if you have a lot of high-interest debt, but it can also cost you money if you don't know what to look for.
There are a lot of credit card companies out there that offer lower interest if you transfer your credit card balance to “their” cards, however, the terms are always different depending on the promotion and card they are offering.
The one question that gets raised a lot is “Is transferring my balance to another card to take advantage of their promotion really worth it?” To answer this question, there are many things to consider. If done correctly, and if you understand the terms, it could save you a lot of money.
I always suggest not carrying a balance on your card, but if you are just starting to pay debt off, having a balance is realistic. So let's dive into this question, and make sure you are making the most informed decision.
Balance transfers are a great option for people who have a lot of credit card debt. The idea behind a balance transfer is to open a new credit card, one that offers lower interest than the one you currently have, and to transfer the balance on your old higher interest credit card to the new one.
The debt on your old card is essentially paid off by the new card. Once the transfer is complete and your new card is showing a balance you can slowly try to pay it off – with lower interest.
This can save you a ton on interest payments, and is the main benefit to balance transfers. In order for you to get the best deal and to make sure you don't end up paying a lot more for the balance transfer than what you thought, there are some things I want you to look out for.
- Related: How to Create a Plan to Pay off Debt
ALWAYS KNOW THE FEES
A lot of cards offering lower interest for balance transfers usually impose a transfer fee. This is a fee that is charged by the bank of your new card. This fee usually depends on how much you are transferring, and is not considered a flat fee. Here is an example of the language you might see regarding the transfer fee.
“The transfer fee is $10 or 5% of the balance transferred, whichever one is higher.”
Pay close attention to the last part of that sentence. The transfer fee is not $10, it's 5% of the amount transferred. This is where they try to trick you. Who has a balance transfer that is less than $10? Really? They stick that amount in the sentence hoping you are just skimming the fine print. Don't make this mistake. From the example above, let's say you are planning to transfer $10,000. Your balance transfer fee will be $500. That means you have to pay $500 to get the benefit of the lower interest. $500 might seem like a lot but usually, it is a lot less than the interest you would have paid by sticking with the higher interest credit card.
Another fee to look for is an annual fee. I have seen some annual fees as high $400. The annual fee is not a game changer when considering a balance transfer, but it's definitely something to be aware of. For me, I would not accept a balance transfer if it had either of the fees listed above.
KNOW YOUR INTEREST RATES
Remember, the benefit of completing a balance transfer is to save money and to pay off debt faster. It makes no sense to transfer a balance from a card with 21% interest to a new card with 18% interest. Most balance transfer offers will have a stated interest around 7% – 10%. Keep in mind, most of the time these low-interest rates are tied in with a promotional period.
Let's say you complete a balance transfer of $4000 to a new card offering 0% on the transferred amount for 18 months. That means you have 18 months to pay down debt without being charged interest. But what happens when you hit the 18 months and you still have $2000 left to pay? Usually, when the promotional period ends, you start getting hit with interest payments, and in some cases, you might even have to pay back interest on the full amount transferred all because you didn't pay the full amount by the end of the promotional period.
NEVER NEVER NEVER MAKE NEW PURCHASES
This is the main trap that is written in the fine print of balance transfers. If you plan to continue on making new purchases on your credit card, there is something you should be aware of. Any new purchase on your new balance transfer card WILL get charged the normal interest rate. For example, let's say you get approved for a $4000 credit line and transfer $3000 to your new 0% interest credit card.
For the sake of convenience, you use this new card for ongoing new purchases. You make new purchases on the card that total $500. You are making really good progress on paying off debt, so you plan on paying off that new $500 at the end of the month to avoid interest on it. Sounds like the responsible thing to do right? It's great you are planning to pay off your spending at the end of the month, but you couldn't be more wrong. You will still get hit with interest on that new $500, even though you paid it off by the end of the month. Why?
You will get hit with interest because you have not paid off the entire balance on the card. The entire balance is made up of new purchases PLUS the transferred balance amount. You still enjoy the 0% interest on the balance transferred amount, but any new spending will be charged the normal interest rate (usually more than 17%) until the entire balance is paid off.
When I completed my first balance transfer, I had $7,500 left in high-interest credit card debt. All of my credit cards where over 20% interest. A local credit union was offering a special deal to members who wanted to make balance transfers to their lower interest credit card. Here were some of their most common terms:
- 6.99% interest FOR THE LIFE of the balance transferred amount
- Any new purchases were subject to 14.9% interest
- A credit check was required to apply for the card
- No annual fee
- No transfer fee
This deal worked really well for me. I made no new purchases on the card, always made my monthly payments on time, and I had my credit card debt paid off in year and a half. Make sure you are completing the balance transfer for the right reasons, make a repayment plan and stick with it. ALWAYS read the fine print, make sure you fully understand it, and if you have questions never hesitate to give them a call. Do some calculations to make sure it's even worth it, and don't get sucked into the unforeseen costs. Completing a balance transfer can save you a ton of money on interest payments, and it will allow you to reach your financial goals sooner.
Have you used balance transfers?