Credit Card Balance Transfers - Should You or Shouldn't You?
, by Rob Kaufman
Before deciding whether or not to transfer a balance from one credit card to another, it's important to know exactly what a credit card balance transfer is. According to Investopedia, a balance transfer is defined as the process of transferring high-interest debt from one or more credit cards to another card with a lower interest rate.
The reason most people transfer balances is so that more of their monthly payment will apply toward the principal balance rather than towards the interest charges. This can help you more quickly get rid of credit card debt.
Should you transfer your credit card balance?
Let's say you've accumulated a large balance on one (or more) of your credit cards. Your APR is high, and you're tired of slowly chipping away at the balance. Therefore, you might think, why not find a credit card with a lower APR and start paying off some real principle?
Since everyone's finances and debts are different, the answer to that question will probably depend on your circumstances. However, before making that decision, there are some significant facts, and concepts to understand.
4 Things to Know Before Transferring Your Balance
Transfers aren't free. Typically, the fee to transfer a balance from one card to another is around 3% of the total amount transferred. That means, if you're transferring $5,000 to another card, a $150 fee will most likely be added to your balance. That's why it's important to check the numbers to ensure that it makes sense to "make the move".
"Teaser" rates expire . Many credit card companies offer a promotional rate with an extra-low APR - frequently a 0% interest rate. Know beforehand when that rate will increase to its regular rate and what that rate will be. The regular rate could be the same or more than the original card's rate. That's why it's important to pay off the balance on the new card before the promotional rate expires.
Adding new debt. Some cards only offer the lowered rate to transferred balances. What that means is that any new purchases you make with the new card will accrue interest at the card's regular, higher rate. Although some cards will apply the promotional rate to new purchases, adding more debt to the card will only undermine your goal of being debt-free. You should consider using the card for one purpose only: paying off current debt at a lower APR.
Pay. Repeat. Applying for a new balance transfer card when your promotional rate expires sounds like a good idea in theory, but in reality, it's a different story. First off, submitting multiple credit applications in a short period could damage your credit score. Secondly, depending on factors in your credit history, maintaining a high level of debt may make lenders see you as a risky borrower.
There are other things to consider when deciding whether to transfer your balance to another card. For instance, transferring your balance from multiple credit cards onto a single card can help simplify your monthly payments. It'll be easier to keep track of only one payment date each month, rather than three or four.
Again, it's important to take a look at your specific circumstances - personally and financially - and see if a balance transfer would work best for you. If the answer is "yes", then do your research to find the perfect card that fits your needs.
See how other myFICO members have handled credit card balance transfers. Visit the myFICO forum any time, day or night.