Whether you're trying to reclaim your credit score, or simply looking for a way to reduce your credit utilization, a balance transfer credit card can be a great solution. Depending on the terms of your balance transfer, you can potentially enjoy low interest rates, as well as a long promotional period that will allow you to pay off your debts in a shorter amount of time.
Beware of High Variable APR After Introductory Period
During the introductory period of your new credit card, you may be able to take advantage of a 0% APR. When you are looking for the best balance transfer credit cards, you will want to know what the APR will be after your introductory period is up. This may be higher than the APR on your current card. You can find out when your introductory APR ends by calling the customer service department, or you can check it online. If you are able to pay off your balance before your introductory APR ends, you will be able to save money on interest in the long run.
Balance Transfer Fee
Depending on the type of card you have, you may also have to pay a balance transfer fee. This fee usually ranges from three percent to five percent of the amount transferred. You will have to pay that balance transfer fee in order to qualify for the introductory APR.
Penalties
You will still have to make your minimum payments by the due date each month. Otherwise, you’ll incur additional fees and potentially higher interest rates. If you make a payment late, you may be charged a penalty APR that is higher than the APR you were charged before the payment was returned. Also, depending on the card you have, you’ll probably also have to pay deferred interest if a payment is returned.
Promotional Period
Typically, balance transfer credit cards offer an introductory 0% interest rate for only a set period of time. Typically, this ranges from six to 18 months. This can save you money over time, especially if you pay the balance off within the promotional period. However, there are a few things you should consider before applying.
You'll need to calculate how much time it will take you to pay off the debt. This will help you decide if a balance transfer is a good option. If you know you won't be able to pay off the balance within the promotional period, consider whether you'll want to carry the balance on the new card.
Credit Card Perks
You should also consider any perks that the new card may offer. Some cards provide purchase protection, rental vehicle insurance, and purchase rewards programs. These programs can allow you to maximize your earnings. You might also be able to leverage rewards to pay for things that you already had planned, such as travel flights and hotel stays. When weighing your options, balance what rewards you might get versus the potential cost of getting a balance transfer credit card.
Credit Score
You also need to consider your credit score. A good FICO score will give you a better chance of getting approved for the best balance transfer credit cards. One of the biggest factors that will affect your credit score is whether you make your payments on time. You can check your credit report for free. You may be surprised at what you find. You may find that you have too much revolving debt or that an old credit mistake is keeping your score down. It might be worth waiting to apply for a balance transfer credit card until after your credit score increases.
Calculate Your Debt
You’ll want to calculate how much revolving debt you have. It may or may not make sense to get a balance transfer credit card, because the actual act of getting a new card could lower your credit score, at least for a short while. Also, you may not qualify for a balance transfer credit card with high enough limits to handle all your revolving debt.
Alternatives to a Balance Transfer Credit Card
Instead of getting this kind of card, consider whether you could simply make a more concerted effort to pay down your debt. Is it possible to take on a side job to double down on your monthly payments? You may have other options for paying your outstanding debt that don’t require outside approval.
Another alternative to applying for a balance transfer credit card is to just get another regular credit card with a lower APR than one that you already have. Then, make higher payments on your old card and use the new card if you need to make new purchases.
Things to Keep in Mind
Remember, your relationship with your new credit card company will probably last years. Even though you may apply in order to meet short-term goals such as transferring high interest debt, you’ll be “stuck” with the new card company. Make sure it’s a reputable company that will serve you well in the long-term.
Also, remember what got you into this position in the first place, which might be overspending. When you transfer your balance, consider canceling your old card. The last thing you want to do is to ratchet up your debt again on the old card. Then you would have doubled your revolving debt, which is exactly the opposite of what you wanted for yourself.
If you are still in the market for a balance transfer credit card, the first thing to do is call your bank or credit card issuer and ask if they offer any special offers. A representative should be able to tell you the best available offers. Next, check online at sites that compare various balance transfer credit cards to try to get the best deal for yourself.
Finally, you might want to review your choice with your CPA. Your CPA can help you make financially sound choices about how best to handle excessive debt.