7 Important Things You Should Know About Balance Transfer Cards
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Zero-interest credit cards can provide a valuable solution for anyone who is attempting to pay off a card with a high interest rate. They can help you pay off debt faster and save money on interest, help consolidate your monthly card payments, or increase your available credit, thereby improving your credit score. (See also: How to Raise Your Credit Score with Credit Cards)
However, there are also a number of reasons you may want to avoid the temptation to transfer your current balance to a 0% APR credit card. Consider these potential pitfalls before signing up.
1. Balance Transfer Fees
Usually when you execute a balance transfer, you will be subject to a transfer fee, which can be between 3%–5% of the total amount transferred. This can be a hefty amount added to your total balance due. But, in comparison to a high interest rate card, you might still end up saving money. You'll have to calculate your monthly interest, how much you would save with an interest free credit card, and whether that is more than the balance transfer fee.
There are some cards, that don't have a balance transfer fee. However, some of these may not offer the 0% promotion period where you don't pay interest at all, or have a shorter period than another card that requires a balance transfer fee. Again, you'll need to do the math to decide what is best for you.
2. It Might Hurt Your Credit Score
Applying for any credit card will result in a hard inquiry on your credit report whether you are approved for it or not, which can result in your credit score taking a hit. This means that even if you aren't approved for the new credit card, your credit score could decline.
If you close the original credit card after making the balance transfer, the average age of your accounts will drop. It will also cause your total available credit to decrease. These factors will negatively affect your credit score. To combat these problems, simply keep the original credit card open (with a $0 balance), even after transferring the balance out of it. However, if you will be tempted to spend money on the old credit card, then it is best to just close it.
3. It's Only Temporary
Zero-interest offers are temporary and usually last between 6 to 21 months. You shouldn't get comfortable with this low APR because it will revert to a higher APR once the intro period is up. When making a balance transfer, it is most important to commit to paying off the balance within the intro period. Otherwise, the interest will start accruing again and it would be a waste of an opportunity to get rid of your debt completely.
4. You Might Not Qualify for 0%
Keep in mind that you don't have a 0% promotional interest rate until you are approved for it. Receiving an application or pre-approval in the mail does not guarantee that you will get it. Also, a 0% balance transfer credit card can't help you if you get approved, but the credit limit on it is so low that it can't cover the amount you want. You'll just end up having two payments every month instead of one.
Always be sure to read carefully what you are applying for. Balance transfers aren't always included in promotional APR offers, so read the offer to see if the 0% applies to purchases and/or balance transfers. Sometimes they only offer 0% for one, not the other.
5. You May Not Be Able to Transfer the Balance at All
Most issuers won't allow a balance transfer from another one of their cards. You'll need to get a card that isn't issued by the same bank as the card you want to transfer the balance from. Check that the card issuer of the credit card you have a balance on isn't the same as the one you want to apply for.
6. You May Be Tempted to Only Pay the Minimum
Many borrowers who open a new zero-interest credit card will be tempted to only pay the minimum amount due, rather than what they were paying on their original credit card. Just because you have a lower intro APR doesn't mean you should be paying any less than you were before. In fact, now is the time to pay off the credit card, when you don't need to worry about interest, so make sure to pay at least as much as you were paying on the original credit card.
7. You May Be Tempted to Spend More
If you have a hard time keeping credit cards open without spending, you may not want to open another card. Adding more debt defeats the whole purpose of opening a card for a balance transfer, and will put you in an even worse position than when you started. And sometimes the 0% doesn't apply to new purchases, which means you'd immediately start accruing interest on any new purchase you make. So the best thing you should do when opening a card for a balance transfer is to not add any new purchases on that card.
How to Make the Most of the Card
If you decide to pursue a balance transfer offer, make sure you are fully aware of the terms beforehand. You'll want to know when the 0% APR is up, what the regular APR will be after the intro rate expires, the minimum monthly payment, and how much the balance transfer fee is. To make the most of the offer, pay off your balance before the 0% intro APR offer ends. Otherwise, you will end up wasting more on the balance transfer fee and the new credit card APR.
The key is to use this card strategically to decrease your debt. If you don't use it for any other purchases and keep your eye on the intro APR expiration date, you should be fine.
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