Should I Open a Balance Transfer Credit Card for my Credit Card Debt?
Offers for balance transfer credit cards seem to be everywhere. They clutter up our mailboxes, inboxes, and our television screens with celebrity endorsements. While such offers may sound very attractive, tread carefully as your credit card debt woes could get worse.
Before you jump into the world of balance transfers, take a moment to understand how they work, their pros and cons, and the pitfalls to avoid.
How Balance Transfer Credit Cards Work
Credit cards used for balance transfers are the same as any other credit cards with one big exception. In exchange for rolling some or all your debt to the new card, you will enjoy a very low or 0% interest for a fixed length of time. All you need to do is complete an application and provide information about your current credit cards. The balance transfer credit company will handle the rest.
The Pros of Transferring Credit Card Debt
Using a balance transfer credit card can be a very sound strategic financial move to help you knock out your debt. These cards offer you:
- Low-interest rates: Rates as low as 0% help you pay down more of your principal balance for the same amount in monthly payments.
- Pay debt faster: Because more of your monthly payment goes toward your principal balance, you can reduce your debt much faster.
- Consolidate multiple cards: Most balance transfer cards allow you to transfer more than one debt, allowing you to focus on a single monthly payment.
- Improve your credit score: If a balance transfer card allows you to pay off your debt sooner, your credit score will begin to improve.
Why Banks Offer Low-Interest Balance Transfer Credit Cards
The positives of balance transfer cards may seem too good to be true. If you transfer your credit card debt, make no new charges or withdrawals, and pay off the balance within the promotional time frame, the banks lose.
So, what’s the catch?
The bank hopes that you fall into one of their traps. In the lengthy legalese of your new credit card agreement, there are trap doors where the credit card company hopes to make their money – these trap doors are the cons of balance transfer cards.
The Cons of Transferring Credit Card Debt
A balance transfer card should only be used to help you get out of debt, not to buy new toys. If you activate a new card to reach a goal of becoming debt-free, the numbers will usually work out in your favor. To know for sure, understand the following negatives of a balance transfer:
- Interest rate after promotion: In most instances, the interest rate that will be applied to your balance after the promotional period will be very high. Check to see if the card’s interest rate is higher than your current credit card. If so, and unless you can pay off the balance before the promotional period ends, a balance transfer may not be beneficial to you.
- Balance transfer fees: Always look for a credit card with a 0% balance transfer fee. If you can only secure a credit card with a transfer fee, make sure it is less than 3% and in exchange, you are getting at least 12 months of zero or low-interest rates.
- More spending: Opening a new card means you now have more credit. The credit card companies know most cardholders will eventually succumb and start spending on their new card. Avoid the temptation at all costs.
- Decreases your credit score: Obtaining any new credit will negatively impact your credit score almost immediately. If you also move multiple balances to your new credit card, you may reach debt to credit ratios that also begin to negatively affect your score.
More Trap Doors
The cons of balance transfer cards should be enough to keep you on your toes. But, if those weren’t enough, there are few other pitfalls to watch out for.
Just because your 0% interest offer is for 12 months doesn’t mean the banks can’t hike up the rate sooner. In your new credit card contract is the language that will allow the bank to increase the interest rate at any time if you:
- Make a late payment
- Have a payment returned
- Exceed the credit limit
Transferring credit card debt to a new card needs to be made cautiously and deliberately. Anyone of these missteps can set your journey to paying down debt backward by months or even years.
Selecting a Balance Transfer Credit Card
You may have many options when it comes to choosing a balance transfer card. The general guidelines for selecting the right card comes down to finding the best combination of four credit card features:
- The lowest (or 0%) balance transfer fee.
- The lowest (or $0) annual fee.
- The longest interest rate promotion period.
- The lowest (or 0%) balance transfer interest rate.
Know that the shortest promotional period must be at least six months. Keep this in mind if you are shopping for a balance transfer card. In the end, it is your monthly credit card payment budget that will determine which combinations make the most sense.
More Assistance to Pay Down Debt
Paying down credit card debt requires discipline and mathematics. Calculating pay off dates and interest rate costs may not be for everybody. While for some, the math is well known, but the temptation to spend gets the better of them.
If you need assistance in conquering your credit card debt, contact one of our professionals today at UmbrellaDEBT. We understand every situation is not the same and would like to help you choose the right path to meet your financial goals.