Everyone has received at least one credit card offer in the mail, sometimes several in the same week. Banks and financial companies are relentless in their attempts to get your business (occasionally they even want your dog to have a credit card). The offers usually include a great starting interest rate – sometimes 0% – and an option for you to transfer the balance of your existing credit cards to the new card. It seems like a great way to save money on interest and an affordable way to pay down your existing credit card debt. But you know what they say about things that sound too good to be true.
Here are five things you should know about balance transfers:
1. How it Works
When you apply for a new credit card, you will usually be able to indicate what other credit cards you have and how much you owe on those cards. When your card is approved, the new credit card company will then pay those other debts, or they will send you credit card checks for you to pay off those balances. Sometimes the balance transfer transaction can take weeks to complete, so don’t assume that you are done paying into your other cards. Keep an eye on the statements for your old cards, or you could miss a payment and incur late fees.
2. Do the Math
To take full advantage of these offers, you need to pay off the amount transferred to the new card within the low-interest-rate period. If you are looking at an offer that will give you 0% interest for 12 months, divide your debt by 12; that is your new monthly payment. If that is not affordable, than the balance transfer may do more harm than good. After the low-interest period, your rates will go up, and the interest will be calculated based on the date the transfer was made. That could mean 12 months of interest at the new, higher rate.
3. Balance Transfer Fees
Take a look at the “Terms and Conditions” portion of the application to see if there will be a “Balance Transfer Fee.” If so, you need to add that amount to your calculation above to determine your monthly payment. This fee is usually three or four percent of the balance ($150 fee for a transfer of $5,000). However, this amount may be insignificant based on the amount of interest you will be saving.
4. You May Need a Great Credit Score
Study the fine print, and see if that 0% introductory rate will actually apply to you. Many times that great interest rate is for approved credit ratings only – meaning a FICO score around 750. Also, after what may be a six- or twelve-month introductory period, the interest rate will go up, and the new rate could be higher than your existing credit card rates, if your credit score is less than ideal.
5. Shelve the New Card
It is common for balance transfer interest rates to apply only to the balance transfer. That means any purchases you make on the new card will be subject to interest (usually the rate that you will be charged once the low-interest period is over). If your goal with the balance transfer card is to take advantage of a low-interest rate to pay off your debt, you won’t be doing yourself any favors by racking up new debt on your new card. Your best bet is to shelve the new card entirely and not use it for any purchases, until your balance transfer debt is gone.
Always read the fine print, and learn all the rules for your new card. If used properly, a balance transfer offer could mean freedom from interest rates and your existing credit card debt.