Let’s play pretend. Come on—it’ll be fun…
Let’s pretend you have credit cards from—oh I don’t know–Macy’s, Nordstrom, CVS or Walgreens, Target, one with your banking institution and that Visa you’ve had since college. All of the cards have different interest rates and the payments are scattered randomly throughout the month. Because of this erratic schedule, you are occasionally late on one or more of the cards every month. Over time, you rack up a ton of late fees and your credit score plummets. If only there was a way to eliminate the hassle…
And then you see it. A credit card that allows you to transfer the balances of some or all of your credit cards to just one card—at 0% interest. All you have to do is apply. Sounds pretty attractive, right?
You can’t lose. Most of your bills will be consolidated, which makes tracking payments and purchases easier. Plus, you’ll only have to make one payment a month instead of four or five smaller payments, and you’ll save tons of money on interest. It’s the answer to your prayers.
Or is it?
In a perfect world
Balance transfer credit cards can save you money on finance charges, late fees, and interest payments by allowing you to consolidate some or all of your credit debt into one card with a low annual percentage rate (APR).
To demonstrate, let’s say you have an outstanding balance of $5,000 on your Macy’s card and the APR is 18 percent. If you transfer the entire balance to a card with a 0 percent interest rate for a 12-month period, you save more than $800, even with a transfer fee of 3 percent.
In the real world
In most instances, you’ll need to have good to great credit—meaning a credit score of at least 720- to qualify for a balance transfer credit card. Most cards also charge a transfer fee for each balance you transfer to the new card; they range anywhere from a flat rate of $10 per transfer to three percent of the total balance being transferred. In addition, annual, membership and late fees may also come with the new card or line of credit.
It gets worse. With most balance transfer offers, the initial incentives that attracted you to the card—low-interest rates and no annual fees—are only available during the introductory period. The introductory period could be as long as 18 months or as short as six. Once the introductory period ends, the APR sky rockets to the true rate of the card, which could be higher than what you were paying initially.
And late payments really cost you. For most cards, a late payment means forfeiture of all of the benefits associated with the introductory period.
To further confuse matters, most cards have low-interest rates that only apply to the balance transfer—any additional purchases will be charged be at a much higher rate.
For example, if you were to select the BankAmercard Credit Card for your balance transfer, you would need to qualify for the 0% introductory rate which lasts for 18 billing cycles. However, this rate only applies to the one-time balance transfer. All other purchases, cash advances and any other balances you may want to transfer will be charged at a much higher APR— for this particular card, it could be as high as 21.24%.
To transfer or not transfer that is the question
The answer to this question will vary from person to person and depends on your unique situation. In order to help you navigate this tricky terrain and get the most bang for your buck, here are a few things you should consider.
The first thing you have to remember is that credit card companies, banks, and lending institutions are for-profit businesses. Meaning they are in business to make money—not to save you money.
Secondly, there are several factors that you must consider when deciding whether or not a balance transfer is right for you long term such as:
- Your credit score
- Amount of the balance being transferred—some cards make it profitable to transfer large sums, while others are better for smaller debts
- Your current interest rate on the debt
- The short-term “teaser rate”
- The APR after the introductory period
- Balance transfer fee
- Membership fee
- Annual fee
- Policy concerning late payments (associated fees and loss of benefits)
- Credit card perks—cash back rewards, earning points and others
Lastly, consider your reasons for transferring your balances. The first reason is obviously to save money. But beyond this fundamental reason you also need to assess your commitment to paying off the balance quickly, and not using the cards from which you initially transferred the balances. Credit card companies have weighed the odds of offering these kinds of incentives and the odds are heavily in their favor. Most people who transfer balances end up incurring more debt than they had initially.
In a nutshell…
A balance transfer is probably not the best option for you if you…
- have poor or “so-so” credit,
- are frequently late making payments or miss payments
- are tempted to use the new line of credit or continuing to use the cards you are transferring the balances from
- will not be able and committed to paying off the balance during the introductory period or shortly thereafter
- are not truly interested in eliminating debt
For those of you that can favorably check off everything on the list above, let’s move on…
Determining the best offer for you
When sifting through all of the credit cards offering balance transfers, be sure to read the fine print and analyze all of the terms and conditions during the introductory period and after.
Here are a few key elements to identify during your search:
1. Look past the smoke and mirrors
You have to look past the introductory interest rate and the fees that are waived during that time. Mike Sullivan, director of education at the non-profit financial education firm Take Charge America, says that it’s important to consider more than just the APR when looking at a balance transfer card.
“A lot of times people just look at the balance transfer terms and that’s a mistake,” Sullivan says. “Finding the right card is probably the best thing you can do. Teaser rates are fine, but I suggest going to websites and seeing which cards offer which rates. You may think that 9.9 percent APR is good, only to find out you qualify for 4.9 percent.”
It is important to see the big picture. Look at the final APR and all of the fees associated with the new card. Fees can potentially erode most of the card’s value, and the initial rate you were offered might not be what you actually get when it’s all said and done. If a card comes with a three percent transfer fee and your balance is $10,000 that is an additional $300 you have to cough up before the transfer is even in place.
Remember, credit card companies are in the business of making money not saving you money.
2. Beware of the bait-and-switch
This occurs when you receive those balance transfer pre-approval offers. You are quoted a credit limit and a low-interest rate but approved for a card with a lower limit and higher interest rate than advertised.
3. Understand how the balance transfer will impact your credit
To get an idea of how a balance transfer will affect your credit score, you’ll need to understand a few basics about your credit utilization ratio. This ratio is simply the amount of credit you’re using (or what you owe on your credit accounts) divided by the amount of credit you have available.
For Example, say you have 3 credit cards:
Card 1: Total amount available: $5,000, balance: $1,000
Card 2: Total amount available: $10,000, balance: $2,500
Card 3: Total amount available: $8,000, balance: $4,000
Your total credit line (or amount available) across all three cards is $5,000 + $10,000 + $8,000 totaling $23,000, and your total credit used is $1,000 + $2,500 + $4,000 totaling $7,500. Your credit utilization ratio is $7,500 divided by $23,000, or 32.6%. Meaning, you are using 32.6% of the total credit available to you.
The safest way to obtain and keep a higher credit score is by keeping your credit utilization ratio below 30 percent, or –in other words– never use more than 30 percent of the total amount of credit available to you. Most financial experts agree that when you do a balance transfer, you should destroy the card or cards from which you are transferring the balances from, but leave the accounts open so you don’t lower your credit utilization score.
It’s also important to understand that transferring your debt to a different card does not eliminate it—it just shifts it. A balance transfer can initially positively impact your credit but the long term effects could be detrimental. However, transferring your debt to a lower interest card and then aggressively paying it off can significantly raise your credit score.
I can see the wheels turning in some of your minds—you are thinking that if you transfer your balances to a low-interest rate card and then when the introductory period ends you can simply transfer the balance again and so on—and essentially never pay interest… Great idea but it won’t work. In fact, moves like that can damage your overall credit score. When you continuously open new low-interest accounts while maintaining high debt levels, lenders will view you as a risk, which will make it harder for you to purchase big-ticket items such as a home or car using credit.
Transferring your balances to a low-interest credit card is a great idea if you are actively working to eliminate debt, have the discipline not to incur new debt or use the old lines of credit, compare offers, read the fine print and clearly understand all of the terms and restrictions that may apply.