If you have existing credit card debt, you might be hearing from credit card issuers with offers for balance transfer credit cards. Offers typically promise a low or zero percent APR (annual percentage rate) for a limited period of time in exchange for you transferring a balance from an existing card to their new one.
Of course, as with any offer of credit, you'll need to meet the card issuer's qualification criteria. It's also common for balance transfer credit cards to charge an upfront fee that can equal about 3 percent or more of the total amount you're transferring, as a fee for the service.
Pros and Cons of Balance Transfers
Whenever you make a decision about how to use a credit tool, it's important to understand how that tool works, and how using it could affect your overall credit standing. Balance transfers offer both benefits and potential pitfalls, and you'll need to carefully weigh for yourself whether the pros are worth risking the cons.
The pros of balance transfers include:
- Transferring an existing credit card balance to a card with a lower APR can reduce the amount of interest you pay.
- Paying less interest could make it easier to pay off your full debt more quickly.
- If you consolidate more than one balance onto a balance transfer card, having one monthly payment can be simpler than paying multiple credit cards- a benefit especially if you've struggled to remember to make on-time payments in the past.
However, pitfalls can include:
- A high transfer fee could outweigh the benefits you might get from a lowered APR.
- If you fail to pay off the entire transfer amount by the end of the promotional period, your APR will reset to a higher rate — one that could potentially be higher than you were paying before making the transfer.
- If you continue to use the paid-off card, you could accrue even more debt.
Things to Consider about Balance Transfer Cards
In order to make a credit card balance transfer work in your favor, it's important to understand a few things about how they work. First, most balance transfer credit cards will terminate the reduced APR if you pay late or miss a payment. Be sure to read the credit card agreement so you understand exactly how your new card works and what you have to do to preserve your promotional interest rate.
Most people open balance transfer credit cards in order to reduce their debt with a lower, more manageable interest rate. However, when you transfer a credit card balance, it's important to avoid adding more debt — either on the old card you've paid off or on the new card with a lower APR. In some cases, the low APR may only apply to the transferred amount; new purchases can be charged at a higher, non-introductory interest rate. And, if balances are carried over, your payments could be applied only to the new charges, resulting in an increased chance of the transferred amounts remaining at the end of the promotional period, when your rates could take a jump up.
You may be tempted to close the paid-off credit card in order to eliminate the temptation to use it. However, closing a credit card account affects your credit utilization ratio. This ratio compares the total amount of credit you have available with the total amount you're using, and it's a factor in calculating credit scores. If you can resist the temptation to make purchases on the paid-off card, it's probably better for your credit utilization ratio to keep the card open.
In addition to affecting credit utilization ratio, a balance transfer can influence credit scoring in another way. Every time you apply for credit — including a balance transfer application — it's noted on your credit report as a hard inquiry. Too many hard inquiries in a short period of time can negatively impact credit scores.
Balance Transfer Card Alternatives
A balance transfer credit card can be an effective way to reduce debt and simplify payments, but it's not the only option available to you. Rather than open a new credit account, you could consider:
- Debt consolidation — This involves bundling multiple unsecured debts like credit cards into a single, lower-interest loan. Having one payment per month can make it easier to keep up with payments and reduce the total amount of interest you pay.
- Credit counseling — A reputable, not-for-profit credit counselor can help you create a plan for paying off debt, and help you learn good credit habits to avoid accumulating new debt.
- Debt management plan — When you consult with a credit counselor, he or she may advise you to go on a debt management plan. The goal of the plan is to pay off unsecured debt; mortgages, auto loans and student debt won't be included. Also, you'll have to close all your credit cards and agree not to apply for any new credit while on the plan.
Applying for Balance Transfer Credit Cards
Depending on your credit scores and the information on your credit report, you may or may not qualify for the optimum balance transfer offer available. Before you apply for a balance transfer credit card, check your credit report and know your credit scores to see what the credit card company will see when you apply.