Amanda L. Grossman is a personal finance writer and the creator of FrugalConfessions.com.
Have you ever received a blank check in the mail from your credit card company? I remember the first time that I did. It kind of fascinated me as typically the checks flow in the other direction.
I figured it must have been a good deal for them to allow me to write a check against my credit card, otherwise they would not tempt me to do so. However, what if it was indeed a good deal for me as well? Wouldn’t it be amazing if you could use one of those blank checks to eliminate your other debt? So I wondered, “Should I do a credit card balance transfer?”
What is a Credit Card Balance Transfer?
If you receive blank checks in the mail from a credit card company, it is typically because they are offering you a balance transfer deal (they also offer cash advances this way, but you wouldn’t fall for that, right?). A balance transfer deal is when you open a new credit card to pay off another credit card by transferring its debt over to the new company.
The lure of a balance transfer deal is the outstanding introductory interest rate (often 0%) they offer you that will undoubtedly beat your current interest rate. Having such a low rate means you can put more money towards paying off your principle rather than just paying on the interest.
Terms of a Typical Credit Card Balance Transfer
The introductory interest rate typically lasts from 6-8 months from your date of balance transfer (or a date specified by the balance transfer offer itself). Even though 6-8 months potentially interest-free on your debt sounds like solid financial management, there are some pitfalls you need to take into consideration before deciding if this is right for you.
- Balance Transfer Fee: There is a balance transfer fee for each offer that is typically a percentage of the debt transferred. A current offer I’ve been given shows that my transfer fee would be $5 or 3% of the balance transferred, whichever is the greatest. This could really eat into any interest savings gained! Sometimes you luck out and your balance transfer fee is capped at $50 or $75, meaning the percentage is much less than other balance transfer offers.
- Be Wary of the Date Your Grace Period Ends: Once your grace period is up, the full interest rate comes into full effect. Oftentimes, the normal interest rate is higher than other credit cards’ interest rates because they need to make up for the low earnings during your introductory offer.
- You Cannot Cannibalize an Offer: Typically you cannot do a balance transfer within the same credit card company. So if you have a credit card for Chase and they send you a balance transfer offer, they are looking to acquire additional debt, not debt that you already hold with them.
- New Purchases get the New Interest Rate: If you decide to purchase items using the new card where your balance transfer is located, the new purchases will be assessed the normal interest rate (this is the rate that is assessed at the end of the introductory period). For my current offer, this amount is 15.24%.
- You Can’t Miss a Payment: Typically missing one or two payments means that your introductory rate offer is revoked and you will automatically be charged the higher, post-introductory offer interest rate.
- Ignore the Artificially Low Monthly Payment: Since it is in the credit card company’s best interest to have you paying on the debt well beyond the introductory rate period, they may set a really low minimum monthly payment. Don’t fall for it! Calculate how much you will need to pay each month in order to significantly or completely get rid of your transferred debt before the introductory grace period ends and the higher interest rate kicks in.
An Alternative to Balance Transfers
Before you walk through this potential minefield, try this alternative. Call your credit card company and negotiate a lower interest rate from them. Think about it: your credit card company is offering these amazing introductory rates to other people. Why shouldn’t they be able to offer something to you? Or lower your rate a few percentage points, which could make a real difference in your debt payoff? If you have a great balance transfer offer in the mail, or even if you don’t, call them today and see what they will do for you.
Hopefully these tips help you answer the question “Should I do a credit card balance transfer?”
If, after weighing all of the facts, you decide that a balance transfer option is for you, then there is one more decision you will need to make. Part of your credit score is based upon your credit history. If you close an account that you pay off with a balance transfer, depending upon the length of time that account was open for, you may ding your credit score. In general you want to keep your oldest credit account open; however, if you know that you are an impulsive shopper and keeping this account open will lead to more spending, then you are better offer closing it down and taking the credit score ding in the short-term for the sake of your net worth in the long-term.
Also check out our Credit Card Debt resource center for more helpful tips and information!
Image credit: flynt