Everything You Need to Know About Balance Transfers
If you have any credit cards, you probably get all sorts of offers in the mail advertising balance transfers at interest rates that seem impossibly low. Before jumping in, learn how balance transfers work and when they can help or hurt you financially.
What is a Balance Transfer?
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First, the basics. A balance transfer is when you take the amount you owe on one credit card and transfer it to a different credit card, which can either be an existing card or a new account you just opened. On the back end, one credit card company pays off your balance to the other one, and you get to switch who receives your payments every month.
What Will it Cost Me?
The upfront cost for a balance transfer depends on the credit card company and the offer they give you. Most companies will charge a percentage of the balance or a fixed minimum balance transfer fee if the amount you are transferring is small. This percentage is usually between 3 and 5 percent, but it can vary.
Some companies cap the fee, and if they don’t advertise it, you can always call and ask for a cap if you will be transferring a large balance. For example, if you plan to transfer a balance of $9,000, this will cost you $450 with a fee of 5 percent. Call the credit card company and ask for a cap of $150 or $200 for the transfer. It never hurts to ask, and it can save you significantly.
All About Interest Rates
When an interest rate seems unreal, dig into the fine print to find out what you will really be paying. If a company is advertising 0 percent interest on balance transfers, first find out how long that introductory rate lasts. It could be anywhere from 10 to 18 months, which often isn’t long enough to pay off a huge balance. Then research what the rate will be after the introductory period and consider whether that is higher or lower than what you are paying now.
In addition, remember that the advertised rate isn’t necessarily what you will get. Your interest rate is based on your credit score, and if your credit score is lower when you apply than it was when you got the pre-screened credit offer in the mail, you might not get the low rate advertised. Therefore, remember to check the terms of your card before transferring the balance.
One last thing to consider is that credit card companies can charge a penalty interest rate if you are even one day late on your payment. This rate can be as high as 30 percent! Therefore, if you miss a payment, you could suddenly go from paying no interest to paying hundreds of dollars each month. Consider setting up automatic monthly payments to protect yourself from penalty rates.
Moving your debt around is not the same as paying it off. Although a balance transfer can reduce your interest rate, it can also trick you into letting your root problems slide. Plus, transferring balances to a new card gives you more available credit and can feed habits of overspending. However, if you use the balance transfer wisely and work hard to pay off the balance during the introductory period, it can provide the boost you need to get rid of your credit card debt once and for all.