One popular way to consolidate debt is to move all the outstanding balances on your credit cards (and perhaps other non-credit card loans) with high interest rates to a single credit card that has a low rate. This lower rate card is often referred to as a balance transfer credit card. Banks offer these types of credit cards as a way to get new customers. But they also have another motive in mind. These credit cards will also bring them new profits in a way that you may not have expected.
In this article, you’ll learn about the benefits of balance transfer credit cards, but you’ll discover some of the hidden pitfalls. And I’m not suggesting that there’s anything scammy or nefarious going on. You just need to know the real deal so that you’re not caught by surprise.
The wonderful thing about consolidating all or most of your debt on one card is that it makes things simple. Rather than writing multiple checks to many creditors, all you need to do is write one check to pay down your debt. Doesn’t get any easier than that right? Plus, with the lower interest rates, you’ll save even more money that can be used to pay down debt faster.
Balance Transfer Credit Card Tips and Insights
However, it’s not all peaches and cream. Here are some other things you need to consider about balance transfer credit cards:
1. The low interest may be temporary – The credit card company will lure you in by offering a zero interest balance transfer credit card. However, this introductory or teaser rate may only last for a few months. After that time period, the rate could jump up significantly higher, perhaps exceeding the rates you were getting on some of your other credit cards.
I’ve seen some offers where the rate will start at 0% or 1%, but the small print says the rates could shoot as high as 25% in 12 months. Making late payments can also cause the rate to rise higher.
And while you might be thinking, “no biggie, I’ll just move my debt to another 0 balance transfer credit card down the road.” Nice thought, but unfortunately, this could hurt your credit score if you do it too often.
So be sure to ask the credit card company two questions:
– How long will the low interest rate remain in place?
– What, if anything, would cause the rate to increase sooner than the quoted timeframe?
2. Expect to pay fees – Gone are the days when you had fee-less bank transfer credit cards. Nowadays, it’s a common practice for the credit card company to charge you a fee of 3% of the amount you want to place on the card.
For example, if you want to move $8,000 from your other cards on to one, it’s going to cost you $240. So you’ll have to do the math and evaluate your personal situation to determine if that still works for you.
3. Don’t expect new purchases to get a sweet deal – If you’re hoping and praying that any new purchases you make with the bank transfer credit card will be anointed with the low interest rate, don’t hold your breath.
Even if the 0% interest rate applies to transferred balances for 12 months, most banks won’t extend that deal to any new purchases you make with that time period. But ask them about their policy on this matter. You may land a rare bank that will cut you some slack.
4. Good credit gets you a better deal – Not everyone will get the low advertised balance transfer rate. When you complete the application for the credit card, the bank will review your credit file and score to determine if you qualify. If you have a high FICO credit score, they will offer you their very best terms. But if your credit is hurting, they’ll either turn you down or be less generous with their terms.
In conclusion, there are some legitimate and good reason to apply for balance transfer credit cards. The low interest is very tempting. But you also have to weigh fees, your credit history, and determine if you can pay off your debt within the introductory rate time period. At least now you have the necessary information to seek out a card that has favorable terms.