So you’ve stumbled on the idea of doing a balance transfer to a lower-interest, or maybe even a zero-interest, credit card. And why not? Many cards like these exist, offering zero balance – sometimes for as long as 18 months.
If that’s your plan, some congratulations or sympathetic mutterings are in order. You’re either about to make a shrewd financial move, one that will save you potentially thousands of dollars – or you’re about to make a classically dumb decision, one that could potentially haunt you for years to come.
You probably know why it’s a good or bad idea. If you transfer revolving debt that you’re paying a lot of interest on to another card, and you pay off the debt, that’s good. If you transfer money to another card, and the debt remains – and you end up racking up revolving debt on that credit card, too – then that’s very bad.
So how can you tell if taking your debt and transferring it to a new credit card is a good plan or ill-advised? Ask yourself if you’re about to embark on one of the following scenarios.
Smart Move: You’re eliminating debt and don’t plan to add to it.
If this is your goal, this can be a fine strategy, most experts will tell you.
“The main way balance transfers can go awry is when consumers get into a cycle of churning balance transfer credit cards,” says Thomas Donaldson, senior credit specialist with CompareCards.com, a credit card comparison site. “If you open a balance transfer card with the mentality that you will only make the minimum payment and then transfer your balance to another card once the intro period is up, you are only digging yourself further into a hole.”
The only good news, in a way, is that the hole can usually only get so deep, as far as balance transfers go. Generally, people with bad credit have trouble getting approved for these cards. So if you’re continually lurching from one balance transfer card to another, and you are racking up a ton of debt and appear to be headed for trouble, most experts say credit card companies are likely to deny you.
Big Mistake: You aren’t paying attention to balance transfer fees.
Consumers really need to watch out for these.
“Most credit cards charge a 3 percent balance transfer fee, so this will increase your balance every time you transfer it to a new card,” Donaldson says.
And plenty of cards charge balance transfer fees as high as 5 percent. So if you’re transferring $10,000 to a zero interest credit card, it could cost up to $500 to do that.
Howard Dvorkin, a certified public accountant and chairman of Debt.com, a financial solutions website, agrees that consumers should do the math and look closely at those fees.
“You pay for the privilege of moving your debt to a new card. The more debt you move, the more you pay,” Dvorkin says.
Bad Plan: You aren’t thinking about your credit score.
Again, if you transfer your balance and get it paid off quickly, that’s going to ultimately help your credit score. But if you do many balance transfers, even if things seem to work out fairly well and you don’t max out all of your cards, you could still be dinging your credit score.
“When you open a new credit card, your credit score will drop a few points as a result of the credit inquiry. So by moving your balance from card to card on a regular basis, you could potentially be damaging your credit, which will make it more difficult to get approved for the next low-interest offer,” Donaldson says.
Big Mistake: You’re planning on closing the card you remove the debt from.
Scott Tucker, a fiduciary financial advisor in Chicago, suggests that you think long and hard about this idea. Closing an old credit card account can hurt your credit score, he says.
“Say you have had a credit card with XYZ bank for 10 years now,” Tucker says. “Some would transfer the balance to a zero-interest card, and close the old credit card account,” thinking they don’t need it anymore. Not so fast, a 10-year-old credit account is a great thing to keep your credit score high, because it shows stability. That’s especially the case if you’ve always paid it on time. You may want to cut it up and not use it but think twice about closing it.”
Big Oversight: You haven’t read the fine print.
There are a lot of little rules you should be aware of before you transfer your debt, especially if money has become tight and you are viewing this balance transfer as a Hail Mary pass to fix your finances.
For instance, Matt Schulz, a senior industry analyst for CreditCards.com, a credit card comparison site, says, “If you won’t pay your balance off in full during the introductory period, it’s crucial to know what interest rate you’ll pay once that period ends. Cardholders can sometimes be surprised to find the new rate is higher than the one they paid on their previous card.”
And things get worse far faster than you might imagine if you end up missing a payment. With some cards, that makes the zero interest rate disappear, meaning you’re stuck paying whatever APR comes after the introductory period.
“You also don’t want to dawdle once you open up that balance transfer card,” Schulz warns. “Many cards allow you 90 days or less to make the transfer. Balance transfers are often a use-it-or-lose-it proposition.”
Big Error: You have no plan for getting out of debt.
You just know that zero interest is good. Eighteen months seems like forever. Getting one of these cards appears to be a no-brainer. But it can also be a disaster.
“The problem with credit card balance transfers is people don’t always know exactly what they’re getting themselves into,” Dvorkin says. “When you take advantage of these offers, you’re moving your debt from one credit card company to another. In other words, you are not eliminating the actual debt.”
If you believe you will pay down the debt and truly have a plan to do so, then, sure, everything will probably work out fine for you.
“You will save money if you use that no-interest time to really pay down your debt,” Dvorkin says.
But do you really have a plan? And will you stick to it?
“What most people don’t realize is that credit card companies know that many people will see the money they’re saving during the no-interest period and simply spend it elsewhere,” Dvorkin says. “Then, when the zero-percent offer expires, they still have big debts to pay at the full rate.”
Source: U.S. News & World Report