Understanding Credit Card Balance Transfers

Understanding Credit Card Balance Transfers.jpg

A balance transfer is when you pay off a higher interest credit card with a lower interest credit card. You're transferring the balance from one credit card to another. A lot people use this strategy with their personal finances to get out of credit card debt. Credit card companies will often advertise balance transfer deals where no interest will be charged for a certain period of time. For example 0% interest (APR) on balance transfers for 12 months. Sounds like a pretty good deal, right? It can be, but there are some things you should know before making the transfer.


Understand the Fees

There is almost always a balance transfer fee. The balance transfer fee is a percentage of the balance you're transferring. For example, let's say you want to transfer $8,000 and there is a 3% balance transfer fee. The balance transfer fee is $240 ($8,000 x 3% = $240). This a factor you should consider when deciding whether or not the balance transfer option is for you. Usually you want to make sure that you end up paying less in transfer fees than you would pay in interest. Here's a balance transfer calculator that will help you decide if it makes sense for you to consolidate date with a balance transfer.


The Interest Rate Expires 

Part of the credit card company's sales pitch is a low introductory rate. Usually these promotional rates are as low as 0% and can be as long as a year. Once the introductory period is over, your interest rate can shoot up pretty high - anywhere from 12% to more than 20%. If you're looking into a balance transfer option as a way to save money on interest and a strategy to get of credit card debt, make sure you're aware of how much time you have before you'll start to accrue interest. If the introductory rate is 15 months, then take a look at your finances and see how much your monthly payment would need to be in order to pay off the debt within that period. The last thing you want to do is squander the low-interest opportunity and end up paying more in fees and interest.


You Need Good Credit

You usually need good to excellent credit in order to qualify for a low to no-interest rate balance transfer. This can be a Catch-22 for some. Your credit could score could be suffering because of the credit card debt, but you need options like balance transfers to help you ultimately get out of debt. Yeah, I know. It's fucked up.


Consolidating Simplifies Payments

If you've got multiple credit cards, with multiple credit card companies and multiple due dates, consolidating will most likely simplify your life. And if simplifying and streamlining the way you handle your credit cards means you won't forget about making payments, it's probably worth it. You'll probably end up saving yourself money in late fees in the long run. Although, it's possible that carrying a high balance on one credit card could be a detrimental to your credit score because of this thing called, your credit utilization ratio, it might be worth the sacrifice to streamline your credit cards. 


Mind the Fine Print + New Purchases

I say this with no judgement to you personally, but with the subtle judgement that all of humanity makes weird and sometimes terrible decisions when it comes to money. If you're thinking about making new purchases on top of a balance transfer, pause and ask yourself what is going on here. There might be something fundamental that you might need to address here.

But if you're going to do it anyway, mind the fine print. Does the low to no APR apply to purchases as well as balance transfers? Make sure you're aware of these caveats before swiping the card and assuming you're getting an interest free loan.


Understand How Payments Are Allocated

Let's say you transferred a credit card balance to a new card and you made a new purchase. The balance transfer is at 0% and the new purchase is at 12%. The bills start to come and you make the minimum payments. Most credit card companies will apply the minimum payments first to the lowest interest. Then anything over the minimum payment will go towards the higher interest rates. Allocating payments this way means you'll draw out the repayment time and interest charges on the debt with the higher balance.


Be Careful

If you're using this strategy to get out of credit card debt, be careful. With multiple cards open, the available credit you  have could be tempting and you may end up in more debt. This strategy works if you have discipline and the earning power to make it happen.