If you have credit card debt, a balance transfer to a low or zero-interest credit card may cut the cost of your debt. But before you seize on a balance transfer as the solution to your debt problem, do a little math to find out if it will actually save you money.
The hidden costs of balance transfers
Even though a zero percent interest rate on a balance transfer offer may sound appealing, transfers are rarely free. Most companies will charge you feesusually 3 to 5 percent of the balanceto complete the deal. Include the transfer fee when you do the math to see if a balance transfer cuts your total debt cost.
"Every balance transfer offer looks tempting," says Melinda Opperman, the chief relationship officer at credit.org. "Some are a good deal, and some could leave you in a worse position."
One of the most important factors to evaluate is the length of time you'll have before a transferred balance starts accruing interest. To woo you to do business with them, credit card companies often offer low or zero-interest rates for transferring existing balances to a credit card account with them. But in considering whether you want to move ahead with a balance transfer, you should know that the new rate doesn't last forever. View the new rate as two pronged: the introductory or promotional rate and the long-term rate.
The introductory or promotional rate is the short-term interest you pay and usually lasts no longer than 18 months. Companies are legally required to offer a promotional period lasting at least six months. After the promotional period ends, the rate jumps to the long-term rate, which could be the same or even higher than the rate you pay with your existing credit card account. If not handled carefully, "balance transfers can be an expensive way to feed a credit card habit," Opperman says.
The attractive introductory rate can also disappear immediately if you neglect to pay your bill on time. "If you miss a payment, the deal's off," Opperman says. "You're going to go back to the regular interest rate on your entire balance."
And keep in mind that even small differences in interest rates can really add up, especially if you regularly carry a balance. For example, if you have a $5,000 credit card balance and make monthly payments of $109, an 18% APR will cost you approximately $3,529 in interest. But a card with a 14% APR will only cost you $2,199 in interest, a savings of $1,330.
If done right, beyond saving on the total cost of borrowing, a credit card balance transfer can help you accomplish a variety of financial goals. Since juggling numerous due dates from your credit cards, utility bills and other household expenses may prove not only confusing but also stressful, transferring all of your credit card debt to one card can greatly simplify your payment responsibilities. Easier tracking eliminates or minimizes missed payment dates and also helps you see your total credit card debt, which promotes better household debt management.
Some credit card balance transfer offers will also let you transfer other kinds of debt that often have higher interest rates, such as auto loans, student loans, appliances or furniture loans. But you'll need to do your homework in choosing the right balance transfer offer.
Paying off secured loans with your credit card can also lower your risk should the worst happen and you default on your credit card balance. Credit extended through a consumer credit card is usually considered an unsecured loan, which means you provide no collateral to back up your promise to repay. This means a credit card company can't easily seize your personal assets to satisfy the debt.
A good example of this is paying off a car loan with a credit card and then transferring the balance to take advantage of a low or zero-interest rate offer. Even if you later default on the credit card, your car loan has been paid in full and the card company can't as easily seize your car in lieu of credit card payments.
Increasing your available credit balance also factors positively into your overall credit score. By taking on a balance transfer offer through a new credit card account and keeping your remaining credit card accounts open, you can help boost your credit score over time as you demonstrate responsible repayment behavior and you pay-down the amount of your debt.
Many balance transfer credit cards offer rewards programs or other bonuses. If you think you'll be able to pay off the transferred balance fairly quickly, you can then use the card for ongoing spending and take advantage of its reward programs. You can earn points for travel, airlines and hotels with a travel credit card or collect gas points with a gas credit card. You can even earn cash rewards with a cash-back credit card.
A balance transfer can be a smart, rewarding move. It's not the answer to a credit problem, but it can help you take one step closer to getting out of debt, the best transfer of all.
How Can I Safely Consolidate My Credit Card Debt? Consumer Financial Protection Bureau. https://www.consumerfinance.gov/askcfpb/1861/how-can-i-safely-consolidate-my-credit-card-debt.html
Your Credit History. Consumer.gov. https://www.consumer.gov/articles/1009-your-credit-history
How Long Does the Introductory Interest Rate Last on Balance Transfers? Consumer Financial Protection Bureau. https://www.consumerfinance.gov/askcfpb/15/i-received-an-offer-from-my-card-issuer-to-transfer-balances-from-another-credit-card-at-a-low-rate-how-long-does-the-rate-have-to-stay-in-effect.html