Should I do a balance transfer?
A balance transfer may be a solid debt repayment strategy, allowing you to save on interest and chip away at your balance over time, but it’s not the best option for everyone. Consider the following to be sure a balance transfer is right for you:
- How much do you need to transfer? The credit limit you’re offered may not cover the full balance you want to transfer. If your balance is too big to transfer all at once, you’ll have to decide if it’s best to transfer a portion, apply for multiple cards or work with your existing creditors to get a lower interest rate.
- Do you have a repayment plan? It’s critical that you go into your balance transfer with a plan for how you’re going to pay off your debt and make the most of a card’s 0% introductory APR (Annual Percentage Rate) period or low ongoing APR. Otherwise, you may just find yourself back where you started. Additionally, if you don’t make timely payments, you could lose your 0% APR and may even trigger a penalty APR.
- What got you into debt? You may be motivated to pay off your debt, but if you haven’t addressed what caused you to get into debt in the first place, you may just use your new card to create an even bigger balance. What’s worse, you could end up stuck with a high interest rate on your new card once the promotional period ends.
- Good credit is required to qualify – To take advantage of the best balance transfer offers, you’ll need good to excellent credit. Instead of trying to do a balance transfer with bad credit, consider a debt consolidation loan or focus on paying down your balances as much as possible before you apply, to rebuild your credit score and get better terms.
If you think a balance transfer credit card is the best way to tackle your debt, here are some things you need to know before you apply.
Balance transfer facts:
Since your balance has been transferred, not cleared, you’ll still have to work hard if you want to pay it off in a timely fashion. The debt doesn't disappear when you do a balance transfer however you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate, including all of your costs.
Promotional balance transfer APRs and transfer rates do expire.
A balance transfer card may woo you with its super-low or 0% introductory APR offer, but don’t be fooled: That “teaser rate” doesn’t last forever. After a set period – often six months to a year or occasionally more – the interest rate will increase to its regular rate, which could be even worse than the one you were trying to escape.
Stick to a plan to pay off your transferred balance before the teaser rate expires.
Be careful adding new debt to old debt with new purchases.
Just because the balance you transferred to the new card gets a free pass with perhaps a 0% interest rate right now doesn’t mean new purchases on the card will be interest free, too.
Some balance transfer credit cards’ rules specify that only transferred balances qualify for the lower rate, while new purchases collect interest at the regular, higher APR. Some cards do apply the introductory interest rate to new purchases, too, but adding more debt to your card’s balance will just make it that much more difficult to pay off.
Learn how payments are allocated.
According to the Credit CARD Act of 2009, issuers are required to apply any amount in excess of the minimum payment to the debt with the highest interest first. Most issuers will apply your total minimum amount payment to the lowest interest debt first, which will draw out the repayment time (and interest charges) on the higher interest debt.
Because of this, it may be best to avoid using a balance transfer card for any new purchases to avoid dual-interest-rate balances.
Julie Sherrier, “9 things you should know about balance transfer cards" Credit Cards.Com, https://www.creditcards.com/credit-card-news/help/9-things-you-should-know-about-balance-transfers-6000.php December 24, 2019
