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how you transfer your debt to a balance transfer credit card the right way.
A 0% balance transfer card can save you money
Clearly paying less interest on your credit card debt will save you money.
Just remember to run the numbers, taking into account the balance transfer fee and the promotional and standard interest rates. I recommend using a good credit card payoff calculator.
Here’s an example of good balance transfer numbers:
Say you have $5000 in credit card debt which requires you to pay 30% interest.
If you pay $300 a month, you will pay off that card in 22 months. It’ll cost you $1,549 in interest for a total of $6,549.
On the other hand, if you transfer that balance to an 18-month, 0% interest credit card your numbers would look like this:
You would pay the same $300 a month for only 17 months, paying $0 in interest for a total cost of $5,000.
Most credit card companies charge a 3% balance transfer fee, which in this example works out to $150.
That means you would save $1,549 dollars minus the $150 balance transfer fee for a total savings of 1,399 with the added benefit of paying off your debt 5 months sooner.
In the interest of balance, we’ll run the numbers on a balance transfer that doesn’t add up to such an obvious benefit once we take a look at the cons.
You can enjoy better terms and even get rewards
The credit card landscape is extremely competitive, and companies are trying harder than ever to capture your business.
Why does this matter?
If you have lousy terms with your current credit card, such as high fees or a short grace period, you can dump that credit card and enjoy better terms with someone else.
Shop for not only the best introductory interest rate but also for a better interest rate once the promotion period ends. Also look for credit card rewards on new purchases.
Here’s the thing:
If you’re going to go through with a balance transfer, make sure the new company treats you better than your current one.
Consolidate your credit card debt to make your finances simpler
Consolidating your credit card debt makes budgeting a little easier and more convenient. Just having all your debt in one place makes it easier to manage and pay down your debt. What’s more, transferring your balance to a 0% card can create space in your budget, which is ideal if you’re trying to stop living paycheck to paycheck.
The Cons of Balance Transfer Credit Cards You Need To Know
The APR is only temporary
Never forget, the banks are making a bet on you.
They are willing to give you an attractive promotional rate and they are counting on you not paying off your balance on time.
If you don’t pay off your debt before the promotional rate expires, you’ll be hit with the considerably higher revert rate. Don’t be surprised if this rate is in the 25%-30% range.
But you don’t have to get stuck with this rate. Instead, do your homework ahead of time and make sure the revert rate is not excessive.
Even better, only get a balance transfer rate if you know you can pay off the balance during the promotional period.
Balance transfer accounts can be very expensive
Typically banks charge a balance transfer fee of 1% to 3% as well as the annual service fee.
In the “Pros” section above, we showed you an example of a balance transfer credit card which saved you money.
Now let’s take a look at a balance transfer that’s not quite a slam dunk like before.
Let’s say you have a credit card with a $3,000 balance in which you are paying 20% interest.
If you are paying $140 per month, you will pay off the debt in 27 months, including $742 in interest. In total, you will pay $3,780 in this scenario.
But what if you found a balance transfer credit card offering a 12-month promotional period with 0% interest and a standard 3% balance transfer fee.
You could transfer your balance for $90 and pay down $1,680 of your debt in the first 12 months.
Your balance (initial $3,000 plus the $90 transfer fee) of $3090 would be $1,320.
Now the bad news:
The promotional period ends and the bank pumps the interest up to 30%.
If you continued paying $140 per month, you would pay off the debt in a total of 23 months. Your total out-of-pocket expenses would be $3,320, including only $204 in interest fees.
To recap this scenario:
Current credit card: You would pay a total of $3,780 over 27 months with your current credit card at 20% interest.
Balance transfer credit card: Including the balance transfer fee, you would pay $3,320 over 23 months. You would save 4 months payments and save $460 dollars.
Don’t get me wrong, $460 is a nice sum and at first glance, and it may seem worth it to do the transfer.
But when you consider all the potential cons we’ve mentioned, $460 may not be enough of a benefit to outweigh the other factors.
The point is, run the numbers and make sure the risk/reward ratio works in your favor.
Balance transfers are not always included.
Don’t assume every 0% APR offer is good for balance transfers. Nearly all of these offers are good for new purchases made on the card. But the same is not always true for balance transfers.
In other words, sometimes the 0% APR offer applies to balance transfers, sometimes it doesn’t.
I can’t emphasize this enough;
Before you consolidate your debt on a new card, check the terms and conditions carefully to ensure balance transfers are also eligible for the promotional rate.
Balance transfers can potentially hurt your credit score
Your credit score can take a hit when you open a new card. Your score will drop if the balance of the new card is over 30% of the card’s limit. Not to worry, making your payments on time will negate this penalty soon enough.
Here is another credit score consideration:
In order to minimize the risk of running up debt, many people close their old account after the balance transfer is completed.
This is wise and it is what we usually recommend.
But there is one exception:
If you’re going to be applying for a home loan in the near future, it’s probably smarter to keep the old account open because closing accounts usually hurt your credit score.
Final credit score consideration:
Closing accounts with zero balance will actually raise your credit utilization percentage, the amount of balance you carry versus the amount of credit you have available to you.
The truth is, the lower your credit utilization – the better your credit score will be. So, closing your old card could hurt your credit score.
That’s not all.
Closing an old account may hurt your length of credit history, which can also negatively affect your score.
In other words, closing your first credit card account may hurt the length of credit history and, consequently, your score. Conversely, closing a more recent account would not affect your score in this way.
If you’re not getting a mortgage anytime soon, you probably shouldn’t worry about the credit hit too much.
Paying off debt, and staying out of debt, are the bigger, more important goals here.
Late payments can kill your APR
Sadly, that enticing 0% promotional interest rate can be lost in the blink of an eye. All it takes is one late payment.
Read the disclosures carefully to make sure you understand the terms of a credit card offer. The card issuers often have the sright, to not only end the introductory period but also to hit you with a hefty penalty APR, usually in the staggering neighborhood of 30%.
You are exposing yourself to potentially more debt
As I mentioned before, the banks are betting that you won’t be able to resist making more purchases and racking up more debt.
So if you’re going to do a balance transfer, vow to yourself that you are doing so strictly to help you pay off your debt.
Cut up your cards, or hide them in a safe place, so you won’t be tempted to use them for impulse buys.
Should you get a balance transfer credit card?
Transferring your debt to a 0% interest credit card only makes sense if the purpose is to pay down debt.
Even then, there are pros and cons to consider when deciding if you should or should not get a balance transfer credit card.
The Bottom Line About Balance Transfer Pros and Cons
The truth is, if you’re considering transferring a credit card balance for any other reasons besides saving money and getting out of debt faster, you probably should not do it.
Don’t fall into the trap of thinking the balance transfer is all that needs to be done to get your finances back on track. If you don’t have a plan to pay down debt and stay out of debt, a balance transfer card will probably be counter-productive and lead to more debt.
But the bottom line is this:
When it’s done the right way as part of a debt reduction plan, and only after you have run the numbers and read the terms and disclosures, a balance transfer credit card can be a very effective tool to save money and pay off debt faster.
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