A credit card balance transfer can be a good way to consolidate debt, allowing you to pay it off faster and save on interest charges. However, you must keep in mind that balance transfers have both advantages and disadvantages. Before deciding to do a balance transfer, it is important to understand these five things about how a balance transfer works.
Lower interest rate
Balance transfers are such a good deal because they usually offer much lower interest rates than you are currently paying. Credit card companies often offer introductory periods where there is a very low interest rate or even 0 percent for borrowers with very good credit. These offers can last anywhere from 6 to 18 months, giving you a chance to significantly reduce your debt.
Some people get tripped up when doing a balance transfer because the new card’s limit is not enough to cover the entire amount they want to transfer. If your credit is not great or if you have a lot of debt, you may not get a very high limit on the card to which you wish to transfer balances. If that is the case, then you need to have an alternative plan. You may need to keep paying off the remaining balance on the old card or find a second balance transfer offer.
Minimum monthly payment
Even if you get a 0 percent interest offer on your balance transfer card, you still will be responsible for making minimum payments. A 12-month 0 percent interest period does not mean 12 months of no payments. If you do not make the minimum payments on time, you could face late fees. In addition, many transfers have clauses that eliminate your introductory rate if you miss a payment.
Almost all balance transfer offers come with a transfer fee, which is usually anywhere from 3 to 5 percent of the balance being transferred with a minimum fee that’s usually around $100. If you are transferring a large balance — say, $10,000 — you could pay a a fee of as much as $500. You have to weigh the fee against what you are saving on interest costs to ensure you are getting a good deal.
Balance transfers to existing cards
Often, a card account you already have open will offer you a low rate to transfer balances. You have to keep in mind that the low rate applies only to the transferred balance and not to additional purchases. In addition, you have to ensure you pay enough each month to cover both the minimum on the balance transfer and your purchase balance.
Balance transfers can be a good way to get out of debt faster. However, they have both pros and cons, and you have to weigh them before going forward.