You have probably received junk mail from a credit card company in the past, many advertising what’s called a balance transfer. These promotions offer attractive interest rates that claim to help you save money, but is it smart to transfer balances on credit cards?
The answer? It depends on your unique financial situation. Read on to learn how a balance transfer works and when it’s the right time to jump on those offers.
What is a balance transfer and how can it benefit you?
For example, let’s say you currently owe $10,000 on a card with a 18% interest rate, and you can afford to put $400/month towards the card. You could pay off the card in 161 months with a grand total of $15,873.50. If you transferred that balance to a card with a 2.99% interest rate, you would pay off the same amount in 111 months and the grand total would only be $10,652.03. Transferring that balance to the card with the smaller rate would save you over $5,000 in interest!A balance transfer simply means that you’re transferring debt from one credit card account to another. The debt does not disappear – the new credit card company or lender pays off the previous card and moves that debt to their card. The debt doesn’t change, but the terms and conditions can. One term that can be beneficial to the card holder is a lower interest rate.
Balance transfers also offer you the ability to consolidate your debt into one simple monthly payment. If you’re carrying debt on multiple credit cards, or even paying monthly installments on big ticket items like appliances or furniture, you may be able to transfer all of those balance to one credit card. One monthly payment means you’re less likely to forget about one of the debts and incur late fees for a missed payment.
Questions to ask before doing a balance transfer
How long does the introductory rate last?The scenario above does not take into account some of the other terms and conditions that may affect the benefits of a balance transfer. Make sure to get the below questions answered before completing a transfer, so you know if the process will actually be beneficial.
If the credit card company or lender is advertising an attractive interest rate, it’s often only for a specific period of time at the beginning of the transfer. Find out how long that rate will last. Your goal should be to pay off your balance by the end of the introductory period to get the most savings possible. This will be easier if the company is offering the teaser rate for a longer period of time.
Will my promotional rate differ from the one advertised?
Those low interest rate offers from credit card companies are only for those with the best credit scores, whereas the rates advertised at your local credit union will apply to all new accounts regardless of score. Make sure to find out the exact rate you would be approved for, and do your savings calculations off of that rate.
What will the rate change to after the introductory period ends?
If you’re not able to pay off your balance by the end of the promotional period, what will the new interest rate switch to? Read that fine print to make sure you’re not going to get hit with a higher interest rate than the card you were transferring your debt from.
Are there any balance transfer fees?
Some credit card companies or lenders charge an up-front fee to complete a balance transfer. The average fee is 3% of the balance amount. You’ll need to account for this fee when deciding if you’ll save more money doing a transfer. Let’s say our above scenario of a $10,000 balance charges the fee. Three percent of $10,000 is $300. Look for a card that doesn’t charge a balance transfer fee, like a card at your local credit union.
Tips for making a balance transfer a success
- Calculate how much money you would save by doing the balance transfer, and create a payment plan you will be able to follow.
- Pay off your debt within the promotional period of the balance transfer with the lowest interest rate.
- Find a credit card that doesn’t charge a balance transfer fee.
- Do not add new purchases on the old card you transferred your balance from, or the new card that you’re working on paying down.
- Pay your monthly payments on time. If you don’t, you could lose your promotional interest rate before the end of the introductory period, not to mention get hit with late fees.
- Don’t repeat balance transfers in a short period of time. This hurts your credit because lenders will see that you’re continually carrying high amounts of debt but also opening many new credit card accounts – a bad combination.
Is a balance transfer right for you?
Calculate how much you could save by transferring your balance to an AmeriChoice VISA credit card. Try out our balance transfer calculator today!The only way you’ll know for sure is if you sit down and calculate what your current debt is, and how much money you could save with a lower interest rate and single monthly payment. Balance transfers can absolutely save you money and help you pay off your debt faster, but only if you follow the tips above.