Balance transfer credit cards offer several advantages, such as letting you make the most of a reduced interest rate. However, they also come with a few downsides, including balance transfer fees or even an annual fee.
So to ensure you get the full benefit of a balance transfer card, make sure you consider these questions before transferring your old balance to your new card.
Do You Plan On Opening A New Credit Card Account?
You should know that opening another credit card can affect your credit. For one, the lender will perform a hard credit check, which temporarily trims points off your score. The second thing is that a new account will reduce your average credit history.
Another thing to keep in mind is whether the balance transfer card’s credit limit is high enough to transfer the entire balance onto the card. You never know if the lender will offer you a large enough credit limit until submitting your application.
Are You Eligible For The Introductory Rate?
If you are preapproved for an affordable promotional interest rate on your balance transfer card, it doesn’t mean you will receive that rate. Generally, low introductory rates are for those with excellent credit, so you don’t want to be presumptuous. The best way to secure a lower rate is to contact the credit card company to ask what you can do to improve your chances.
How Long Is The Introductory Period?
Introductory periods must last a minimum of six months, though some credit card issuers extend it for up to 18. Before you transfer your balance, read the terms and conditions to know exactly how long the promotional period lasts. That way, you can avoid an unpleasant surprise when the regular interest rate kicks in.
What Is The Regular Interest Rate?
After the promotional period ends, the regular interest rate on your balance transfer could soar from zero to as high as 22.99%, depending on your credit and your card’s APR. If you don’t pay the balance before the introductory period ends, your monthly credit card bill could become more than they were on your old credit card. For this reason, you should attempt to pay down as much of your debt as you can before the introductory grace period ends.
How Long Do You Need To Pay Off Your Balance?
Before you make a balance transfer, you should have a debt repayment plan. This will give you a better idea of how long you need to pay the balance so you can find a sufficient introductory period. If you can’t pay your debt before the promotional period expires, aim to do so as soon as you can. You don’t want to get stuck with expensive interest payments that could go to the principal.
Will A Balance Transfer Card Save You Money?
Just because a balance transfer card has a lower rate doesn’t mean you’ll come out ahead. There’s still the balance transfer fee and annual fee to consider. It would be best if you used a balance transfer calculator to find out for sure whether moving your balance will save you money.
Do You Already Carry A Balance On Your New Credit Card?
Maybe you’re not opening a new credit card, and you want to move your money to an existing card with a lower rate. Since credit card payment allocation guidelines state that the minimum payment goes to the balance with the lowest interest rate (in other words, your balance transfer), any amount that exceeds the minimum will go toward the balance with a higher rate.
The silver lining is that balance transfers don’t accumulate interest if the card comes with a zero-APR introductory period. The downside, though, is that you might not be able to pay off the entire balance before the end of the promotional period because of that original balance.
How Much Will Your Credit Utilization Rate Increase?
Credit utilization is the amount of credit you’ve used against the amount you have available. It accounts for 30% of your overall credit, making it the second-biggest factor. As a result, you want to keep this rate low. If you’re going to transfer your balance to a new credit card, but it exceeds the 30% threshold, your credit could sink. So before you do anything, look for any potential consequences it could have on your credit.
- Irby, LaToya. “8 Ways to Know If That Balance Transfer Is Really Worth It.” The Balance, 30 July 2020, www.thebalance.com/credit-card-balance-transfer-961078.