If you carry a balance on a high interest rate credit card, you may occasionally ask yourself where your money is going. Even though you diligently make payments every month, one day you realize that it will take years to pay off your debt because so much of the payment is going toward interest charges.
Then you remember you’ve heard about something called balance transfer and how it can help you pay off your debt faster. Transferring a balance to a low-interest card can be a great way to tackle an overwhelming debt. However, despite the apparent simplicity, choosing a balance transfer credit card is not always so straightforward. You will want to consider several factors, including your short- and long-term goals.
When and Why to Consider Balance Transfers
Many people transfer their high-interest balances for one reason â€” to save on interest, thanks to the proliferation of introductory 0% Balance Transfer APR credit card offers.
However, there are other reasons why balance transfers can make good sense. One benefit is potentially simplifying your financial life. For instance, instead of having several credit cards and installment loans (yes, you can consolidate those as well) you’ll only have one bill to pay every month, which can make managing your finances easier.
Do Not Overlook the Fees
1. Balance Transfer Fees. Even though you’re getting a 0% introductory APR, it doesn’t mean that the service is completely free. In most cases, you will have to pay a 3-5% Balance Transfer Fee. Of course, the smaller the fee, the better.
2. Annual Fee. You don’t want to pay an annual fee for a balance transfer card if you can help it. Fortunately, with a bit of research, you would find a number of credit cards that do not charge an annual fee.
Other Balance Transfer Considerations
1. Introductory 0% APR Period for Balance Transfer. The 0% introductory APR is usually for a period of up to 12-18 months, and your APR will increase as soon as the intro period is over. For paying down a debt, if you take advantage of a 0% introductory offer, then it’s ideal to have a longer intro period to allow more time to pay down the balance.
2. Introductory 0% APR Period for Purchases. In some cases, new purchases on cards with an active 0% balance transfer offer will incur interest at the standard purchase APR, unless the 0% introductory APR applies to new purchases on the card, as well. Know whether the introductory APR applies to both the transferred balance and any new purchases you might make with that card.
3. APR. Pay attention to the APR after the 0% introductory offer expires on the card, as this will be the new APR that applies to the balance remaining on the card. If you want to pay down your debt, a good goal is to pay it off your debt within the 0% introductory period before this APR becomes active.
You May or May Not Be Able to Replicate It
Don’t count on being able to repeatedly roll over debt to another zero interest balance transfer offer, as over-utilizing credit could lower your credit score and make you less likely to qualify for another zero interest offer.
In addition, you’ll pay Balance Transfer fees for each transfer. While 3% may not sound like much, you would pay $300 for transferring $10,000. While it’s definitely better than paying over time on a high interest card, this is not small change.