An introduction to credit card balance transfer.
The average credit card debt in the U.S. is $5,331 on an individual level. But, if you’re new to the credit game, you’re not likely part of this statistic. For those of us that have been building and maintaining credit for a while now, we know there are some common techniques to keep balances and interest rates low. You’ve likely heard of balance transfers between credit cards. This is essentially chasing low or no interest initial offers, then moving your balance once the incentive runs out.
I know, this sounds great, right? Well, before you go any further and transfer your balance, we suggest you have a look at how it works and what the pros and cons are:
How does it work?
The process is pretty simple to understand. When you have a high interest rate on your credit card, you try to move that balance to a new credit card with a lower APR (annual percentage rate). This way, you reduce the amount of interest you are paying on all of your credit card debts. This is usually done by moving your balance as incentives expire.
Credit cards are a competitive business, and offering a 0% introductory interest rate is a common practice. After the first year, the interest jumps back up to a standard rate. Before this happens, the borrower opens a new line of credit, transfers the balance and closes the old line.
It seems like a solution to all of your debt problems like a messiah for your finances, right? Well, that’s because you don’t know its drawbacks yet.
Remember, if it is too good to be true, it sometimes is! If you want to know the common advantages and disadvantages associated with credit card balance transfer, then have a look at some below:
Pros of Credit Card Balance Transfers:
- Lower Interest Rate: A new credit card can provide you with as low as 0% APR for a temporary time.
- Get Better Terms: You may get better terms like lower fees, purchase rewards or more grace period.
- Consolidate Your Debt: You can combine multiple balances onto one credit card. This is good for credit utilization and simplicity of payments.
Cons of Credit Card Balance Transfers:
- Higher Interest Rate: You will only be able to qualify for the promotional lower APR if you have an excellent credit score. Otherwise you may end up with the regular higher interest rate. And even if you qualify, the lower APR won’t last forever; it will eventually expire, and at various times.
Balance Transfer Fee: You may have to pay a balance transfer fee which is usually 3-5% on the amount you transfer and also a minimum of $5-$10.
- Your Credit Score Could Get Hurt: Applying for a new credit card hurts your credit score. Also, if your new card has a low balance limit and you transfer your debt to this card, and the total balance goes 30% above the limit, you will get a decrease in your credit score as well. Credit utilization is a major factor in your credit score.
- You May Get More Debt: When you transfer the debt to a new credit card, you will have more credit available. This means you can spend more money now and if you are not self-disciplined. Our advice, close the card as soon as the balance is transferred. Otherwise you may end up with more debt than what you originally had.
Now you may be wondering, is it a good idea to transfer balance? In short, NO! Not only it can it hurt your credit score, it’s a slippery slope to more debt. With that said, if you have excellent credit and money management skills, then yes, you can use this method to your advantage. Just tread carefully, it can be a full time job to manage finances using advanced techniques like this successfully.