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Those balance transfer offers can sound really enticing: zero percent interest for up to 12 months. Two of our favorite rewards cards, Chase Freedom and Discover, are offering zero percent interest on balance transfers, along with a host of other credit card issuers. This can look like a great way to get out of debt faster by paying off your current debt at a lower interest rate.
As far as debt consolidation goes, a balance transfer to a zero percent interest credit card is one of the safest ways to consolidate debt, with no closing costs, a small impact on your credit rating, and a quick solution to high monthly payments.
But wait. Here are five things to think about before you apply for that enticing balance transfer offer from a top-tier rewards credit card.
1. What will the balance transfer really cost you?
Even zero percent interest balance transfer offers typically carry fees -- usually about 3 or 4 % of the balance transfer. Do the math to find out how much you'll be adding to your debt. Then use an interest rate calculator to find out how much interest you'll pay on your existing debt at your current interest rate making the maximum payment you can afford each month. Will it cost more to transfer the money, even at 0 % interest? Also consider the possibility of calling your current credit card company, telling them about the balance transfer offer, and asking them to lower your interest rate. They probably won't give you zero percent, but they may lower your interest rate -- especially if you sign up for automatic payments.
2. How quickly can you pay off the debt at zero percent interest?
The best balance transfer offers will give you about 12 months to pay off your debt before your interest rate rises. But is that enough time for you to pay off the debt? If not, is the regular interest rate higher or lower than your current card? Of course, if you make timely payments, you can always bounce your balance back to another 0 % offer at the end of 12 months, but you'll pay fees again and it's a bad practice to get into.
3. How will it affect your credit rating?
The point deduction to your FICO credit score when you apply for new credit and again when you open a new account is minimal. And when you transfer a balance, you'll gain points because your debt-to-available-credit ratio will improve. Still, if you plan to apply for a mortgage, home equity loan or car loan in the next six months, it's best not to open new accounts. It's also a bad sign to creditors if you open multiple new accounts, so even if you're not buying a house anytime soon, keep your balance transfers to one new card only.
4. Will you be approved for the offer?
I received a pre-approved offer in the mail for Discover More, but it turns out I was “pre-approved to apply for” the card. I was turned down. Since these hard credit inquiries when you apply for a new card lower your FICO score, it's best to make sure you'll be accepted by getting free copies of all three of your credit reports, looking for any errors or discrepancies, getting them fixed, and then taking a good guess as to whether or not you'll receive the credit card you apply for. Read fine print carefully, too. “pre-qualified” and “pre-approved to apply for” is not the same as “pre-approved.”
5. Are you responsible enough to handle another credit card?
When you play the balance transfer game, this is the big question to ask yourself. Will you really stop using the card that now has a zero balance so you can get out of debt faster, or are you just freeing up more available credit to dig yourself deeper in debt. This is the question creditors ask themselves before approving you for a new card, but you should know the answer yourself, too. If you feel like you have a spending problem, seek credit counseling. But don't apply for new credit if you know you can't handle it responsibly.
Balance transfer offers are a great way to consolidate your credit card debt to pay it off faster -- if you use them responsibly.