Latest posts by Kumiko Ehrmantraut (see all)
- Instant Gratification Wish List: Becoming a Patient Spender - July 17, 2019
If one of your financial goals is getting out of debt, opening another credit card could be the worst – or best – option you have.
As we all know, credit cards carry exceptionally high-interest rates. These rates can quickly escalate your debt, wreak havoc on your monthly budget, and even completely derail your long-term goals.
However, if you are sinking under a significant amount of credit card debt, getting another card – for the sole purpose of a balance transfer – could actually be a smart move for you. If you are the right candidate, a balance transfer can help you get out of debt faster while also giving you relief from the high interest you are currently paying.
Let’s take a look at how a balance transfer works and whether or not it’s the right move for you.
What is a Balance Transfer?
There’s nothing sexy or mysterious about a balance transfer. It is merely the process of moving debt from your high-interest cards to a lower or 0% interest card. This balance-transfer card is just like every other credit card except it comes with a very low or 0% introductory rate for several months.
With this offer, you can move your debt over from your current high-interest cards, potentially saving you hundreds of dollars in interest. You can do this with minimal or even no fees, and make faster progress by putting the money that WAS going toward interest into paying off the actual debt.
Why a Balance Transfer Might NOT be Right for You
Before I cover the perks of a balance transfer, let me say that – for some people – a balance transfer just isn’t a good idea.
First, you have to be committed to getting out of debt. If you are tempted to continue using your existing cards after transferring the previous balance onto the new card, this option will just spiral you into more debt. You MUST be committed to eliminating your credit card debt.
Second, you may not qualify for the promotional interest rate. Just because you are pre-approved for the card, does not mean you are approved for the 0% interest rate. Most issuers will require you to have a good credit rating to qualify. Specifically, this means your FICO score should be around 700 or higher.
If your score is below 660, you are considered a subprime borrower, and you will struggle to qualify for a balance transfer card. Even if you do manage to qualify, you probably won’t be given a credit line that’s high enough to make a difference.
Third, if you have less than $1,000 in credit card debt, you may benefit more by simply paying off your current cards. On the other hand, if you have a lot of credit card debt – say, more than $8,000 – a personal loan might be more cost-effective in the long run.
Fourth and finally, if you are only transferring your balance to avoid a credit card payment this month, or to put off paying interest, you may be putting your financial security in jeopardy.
Balance transfers take time, and you risk your original payment being overdue. Moving your balance every 12 to 18 months merely postpones the inevitable. Either of these moves can damage your credit score. If you can’t afford to make your credit card payments, you need to explore other options that are available to you.
However, for those of you who are committed to eliminating your credit card debt, let’s look at what you need to know before transferring your loan balance.
What You Need to Know about a Balance Transfer
The most important aspects of making a balance transfer are finding a card with:
The lowest possible APR (hopefully 0%).
Hundreds of cards offer introductory rates. Read the fine print to determine if what they offer is actually what you need. Also, choose a card from a different issuer than any of your current cards. Most issuers won’t allow you to transfer balances between their own cards.
The longest time period for this introductory rate (most are 12 to 21 months).
Obviously, the longer the low-interest-rate applies, the more time you have to pay off the debt. Make sure the introductory rate applies to balance transfers.
No annual fee.
If the new card has an annual fee, that’s money coming out of your pocket with nothing to show for it. Use a balance-transfer calculator to estimate the cost of the new fee versus your current interest rate. Only consider a card with a fee if it is your best option and won’t end up costing you more than it saves you in the long run.
An adequate line of credit.
A large percent of your FICA score takes into account the amount of your debt compared to your line of available credit. If the balance you transfer takes up more than 30% of the available credit on the new card, this can hurt your score. Of course, paying that balance down will bring your score back up, but it’s a factor you should consider.
Other Important Considerations
All Debt is Not Equal
It’s possible that one of your current cards offers a low APR on transfers. While it may seem like an easy option to move all your other credit card debt onto a card you already hold, there are negative factors you should know.
For example, if you already have a balance on this card, then transfer debt over from another card, this debt is not treated equally.
When you make a minimum monthly payment, the total amount goes toward the low-rate transferred debt. This means your existing debt continues to accrue the highest interest rate without being paid down at all.
Whatever payment you make above the minimum payment goes toward the highest interest rate, which could mean your transferred debt will accrue interest unless your rate is 0%.
Don’t Let the Time Run Out
Finally, for a balance transfer to be effective, you must be able to pay it off during the low-rate promotional period. The whole point of a balance transfer is to eliminate or reduce your interest rate so you can pay off your credit card debt as soon as possible.
If you aren’t able to pay it off before the lost interest APR period ends, you could be subject to an even higher interest rate than you currently have or be subject to back-interest.
Before making the final decision, use a credit card payment calculator to determine what your payment needs to be. You need a monthly payment amount that will get the debt paid off in time that also fits your current budget.
How to Treat the New Balance-Transfer Card
Once you have found the right card, done all the math to make sure you can make the payoff within the introductory time frame, and made the transfer, it’s just a matter of time until your current high-interest credit card debt is no more.
Once the debt is paid, decide what you will do with this card. If it has an annual fee, or if the temptation to use it is just too high, your best option is to close the account. However, there are more pros than cons when it comes to keeping the card active.
If you are enjoying the newfound discipline that comes with financial responsibility, keeping the card open gives you a greater line of credit, which is a plus for your credit score.
A Balance Transfer Can Be a Lifesaver IF
If you do it right, a balance transfer can be the lifesaver that keeps you from sinking under your credit card debt. The key to being successful is to stop using your existing cards and stop charging more than you can pay off each month.
[…] What is a Balance Transfer, and is it Right for You? […]