By LAURA ROSS
If you're carrying a balance on one or more high-interest credit cards, a balance transfer card can save you money and help you pay down your debt.
Balance transfer cards offer very low transfer rates for bringing a balance over from a different card. If you're paying a lot in interest on your current credit card balances, transferring those balances could benefit you in two different ways.
- Low interest to pay down balances. With the low rates that come with many balance transfer cards, you can keep your monthly payment the same and more of it will go toward reducing your balance because less of it will be going toward paying interest.
- Consolidate debt to simplify payments. If you're currently carrying a balance on several cards, balance transfers can enable you to consolidate all of those different monthly payments onto one card. You'll benefit from the lower rate, and you'll be less likely to miss a payment, as there's only one to keep track of!
Applying for a card - things to watch out for
If you aren't careful, the wrong balance transfer offer can land you in an even worse position than when you began. It's important to be realistic about your payment goals and fully understand what you're getting into to make the most of a balance transfer credit card. Here are some important factors to consider.
- Transfer rate. Most offers include a 0-3% introductory interest rate that usually lasts 6-18 months, depending on the offer. Make sure you know how long your interest rate will last and what it's going to jump up to afterward. If you aren't able to completely pay off your balance during the introductory period, you could end up with an even higher interest rate than you started with. If this is the case, you may want to specifically look for a card with a lower APR for the long-term.
- Transfer fee. Most cards will charge a 3-5% balance transfer fee. This means that if you're going to transfer a total balance of $8,000, you will have to pay an additional $240-400 off the bat. Make sure to keep this in mind when deciding whether a balance transfer card is right for your current financial situation.
- Transfer window. Some balance transfer cards require you to transfer your balance within a certain amount of time to be eligible for the transfer rate. Make sure to look into any perks or limitations that are tied to transfer windows.
- New bank. Most offers require that the balance being transferred comes from a different bank. If you're looking at an offer from your current lender, verify that you will be able to transfer the balance you hope to.
- Approval odds. Due to their competitive rates, balance transfer cards often require borrowers to have excellent credit. Make sure to consider your own credit score when applying for a balance transfer card, and try to apply for cards that you are well-qualified for.
Using your card
Once you've received your card and transferred your balances, make a point to use your new card responsibly. Here are some things to keep in mind.
- Avoid balance transfer surfing. This is the practice of transferring your balance to a new card every time the introductory period ends to avoid paying interest. In short, don't do it. Doing so will end up costing you a lot in balance transfer fees and can actually increase your debt. In addition, it will reflect poorly on your credit history. Borrowers who constantly move their balances around low-interest cards do not reflect responsible borrowing habits.
- Minimize new purchases. To make the most of a balance transfer, you should avoid making new purchases. Try to focus on aggressively paying down as much of your balance as possible before your introductory period ends. If you do need to make new purchases, be aware of the interest rate you'll be charged. With balance transfer offers, the introductory rate often applies only to the balance transfer itself, and new purchases may be charged the regular APR from the beginning.
- Know how payments are applied. If you do end up paying for new purchases at a different APR, know how your payments are going to be applied. The CARD act requires that any payment amount over the minimum payment be applied to the highest interest debt on the account. However, the minimum payment itself may be applied to the lowest interest debt. This could mean that you end up paying off your 0% balance transfer while your new purchases accrue interest.
- Be wary about closing old accounts. Now that you've transferred the balances from your high interest cards, you may be tempted to close these old accounts so you don't run them up again. Before doing so, make sure that you consider the implications this could have for your credit health.
Before applying for a balance transfer card, figure out how long you can take advantage of the introductory rate and how much of your balance you'll be able to pay down in that time. If you'll be able to make a significant dent in your debt by taking advantage of the low rate, even when you factor in the balance transfer fee, you should consider applying for the offer. However, if you're considering a balance transfer offer just to take a break from interest and plan to continue accruing debt, it could end up working against you. The transfer fee will increase your balance off the bat, and the interest-dodging habit can reflect poorly on your credit. Be honest with yourself and set realistic goals. Use balance transfers to take charge of your debt, not to avoid it.
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