The chance to transfer your credit card balance can be an appealing offer, especially if you’re paying a high interest and owe a large amount of money on your current credit card. Balance transfers can, truthfully, be a great deal as long as you understand the terms and avoid a few common mistakes. Remember that these credit card companies are planning on getting something out of the deal; they’re assuming that you, like most people, won’t realize the cost you’ll pay when you transfer a balance.
Balance Transfer Fees
The first thing to check when you’re shopping for a balance transfer credit card is the balance transfer fee. This may be a flat rate like $50 but it’s usually a percentage of the amount you’ll be transfering.
The fee can be as low as 1% and as high as 5%, although 3% is very common.
This may not sound like a lot of money but it can add up, especially on large balances. You also want to check that the balance transfer fee has a limit or cap.
Avoid credit cards with no cap, particularly if you are transferring a very high balance.
Always do your math before transferring your balance. Make sure the amount you’ll pay in fees is lower than the amount you’d pay in interest with your old credit card. Remember that 0% balance transfer offers aren’t including the balance transfer fee–they’re simply referring to an introductory APR on your balance.
Other Interest Rates
Another important thing to check when transferring your balance is the other interest rates you’ll be paying. You’re still getting a credit card that you can use to make purchases so read the terms and understand the interest you’ll pay if you use the card. The interest rate will be just as high, if not higher, than a standard credit card.
Defaulting on payment terms is something few people consider when they’re transferring a credit card balance. Keep in mind that the balance transfer offer is only good while you make payments on time, however. If you ever have trouble making payments or pay a few days late you’ll lose your low rate or introductory term and you’ll immediately start paying a higher interest.
Payment allocation is another important feature of a balance transfer.
Many people are completely surprised when they discover that their payments are not allocated how they wanted them to be.
Here’s an example. You transfer $800 and make a purchase of $200 with the credit card. Soon after you make a payment of $300, assuming the payment will cover the new charge and knock $100 off the transfer balance. When your statement comes next month, however, you see the $200 still there.
Well, the credit card company can allocate payments however they want and they’re going to allocate it to the 0% interest balance instead of the $200 you may be paying 15% on. This is one way for them to make money during balance transfers and it can be confusing to many consumers.
The best thing to do is not use a balance transfer credit card to make new purchases until you’ve paid your balance transfer in full.
Interest Rate After Intro Period
Another mistake many people make when they transfer balances with a 6 or 12 month 0% introductory APR is not checking to see what the interest rate will be after the promotional term ends.
This is very important unless you’ll pay off your balance within the promotional period, otherwise you could suddenly be paying an interest even higher than your old credit card.
Remember to do what will make financial sense for a longer period of time.
Low Fixed Interest vs 0% Introductory Period
Lastly, everyone should consider which will benefit them longer: a low, fixed interest rate or a 0% introductory period offer.
Remember that the introductory periods don’t last forever; you’ll need to have a plan for when the normal interest rate commences. Any balance remaining after the promotional term will suddenly be under a new, high interest rate.
If you’ll have your balance paid off before then you don’t have anything to worry about.
If, however, you have high balance that will take a while to pay off, consider the benefits of a credit card with a low, fixed interest of 1.99% to 3.99%. This will usually save you much more than an introductory term of six months at 0% interest.
Closing Thoughts on Balance Transfers
These tips are designed to help you shop for the best balance transfer credit card.
Keep in mind the interest rate you balance will be subject to after the introductory term and remember to read all the terms associated with your new credit card.
Don’t fall prey to balance transfer fees and don’t accept a credit card offer with an introductory term if you won’t be able to make your payments on time. Keeping this advice in mind will help you avoid balance transfers that cost more than they’re worth.