Are Credit Card Balance Transfers a Good Idea?
Statistics show that the average American household carries a credit card debt of about $10,000.
If you are one of these consumers who carry a substantial credit card balance which you just can't see yourself paying off in the next few months, you may feel that getting another credit card is the last thing that you would need.
However, if you are able to avail of a 0% balance transfer offer that is really free of any hidden charges, you could end up saving yourself hundreds (and even thousands) of dollars in interest for about a year.
Quick answer: Balance transfers are a good idea if they'll help you minimize (or eliminate) interest charges when the balances are transferred to a card with a low APR (even better if you don't have to pay a balance transfer fee -- normally 3%).
Balance Transfer – What It Is
For those who may be new to the concept of credit card balance transfer, it's basically transferring your debt from one credit card to another which offers better terms and a lower interest rate, with some offering as low as 0% interest.
The low interest rate offer for the balance transferred to the new card is usually available for only a limited time, usually 6 to 12 months.
How It Can Help You
Switching to a new credit card can be beneficial to your personal finances, allowing you to save a lot on interest fees and simplifying your financial life. But that's only if you are able to stay focused on the current debt and manage to do the following:
- Pay off the balance within the time frame that the low or zero interest is in effect. That's the whole point of availing of a balance transfer, isn't it?
- Refrain from using your credit card for additional purchases. A balance transfer offer typically quotes a low rate only for the old debt and imposes a much higher rate for regular or new purchases.
- Always pay the bill on time. A delayed payment, even once, can result in the forfeiture of the promo rate, jacking up your interest rate to sky high levels and earning you a penalty fee besides.
How It Can Hurt You
A word of warning: a balance transfer is good only for those who are able to take control of their spending habits. When questionable credit card management is left unchecked, a balance transfer can actually hurt the consumer because:
If you are unable to pay the full balance at the end of the low rate period, the interest rate will most likely skyrocket to levels higher than your previous card, leaving you further mired in debt.
Availing of yet another balance transfer program of another bank or financial institution can affect your overall credit score.
Switching from one low-interest rate card to another yet failing to lower down your outstanding debt may cause lenders to see you as a high-risk consumer, thereby hurting your chances of qualifying for major loans such as house or car financing.
By taking into account only the low interest rate and not the other features of the new card, you could end up getting a credit card that's not suited at all to your needs and lifestyle.
The Fine Print
Before affixing your signature on the dotted line, always know what the fine print says.
Here are some stipulations that you should watch out for:
The 0% percent rate may not be applicable to all individuals. In some instances, banks may choose to award this rate only to cardholders of a certain credit standing. If you have based your computations on 0% and not end up getting that rate, you would need to make adjustments in your budgeting.
While you may get a very low or even zero interest rate, don't count out the other fees that may be charged in the process. A transfer fee of about 2% to 3% of the amount is usually charged for every balance transfer transaction.
Some banks may also fail to mention beforehand that the 0% is only applicable for the balance transfer amount and not on new purchases. Interest rates for such could be anywhere from 10% to 20%, or even higher.
Although the credit card reform bill could change this in the near future, for now the fine print usually states that whenever a payment is made, this should first be applied to the low interest debt. This means that it would be virtually impossible to pay off your new purchases unless you've paid your old debt in full already.
The above tips should be able to guide you in weighing in all the options first before signing up for a credit card balance transfer.