The idea of Balance Transfer Day is that people should use December 11, 2011, as a day to find better interest rates so they can move their debts to a different financial institution and avoid giving away more of their money to banks via interest payments.
We wanted to provide a few tips to anyone who is considering a balance transfer on December 11th — or anytime.
1. First, make sure a balance transfer is right for you
The benefits of a balance transfer depend entirely on your particular circumstances and the type of offer you receive. Most balance transfer offers have a fee and a low introductory rate (in some cases 0%) for a period of about 6 months. After that period, you begin paying the regular interest rate.
So you need to know what these numbers are and understand how they’ll affect your credit card balance. For example, if you have a balance of $10,000 and the offer has an up-front transfer fee of 4% and then a 0% APR for a 6-month introductory period, you’ll end up paying $400 for the first six months.
That might be a good thing for you if your current interest rate is very high — say, around 20%. If that was the case, you’d pay $400 but end up saving around $1,000 in interest, so your net savings during the 6-month period would be $600. As long as the interest rate on the new account (after the 6-month period) was lower than 20%, it would be a good deal for you.
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2. Don’t forget about your credit score
Despite everything written above, the balance transfer may not be a good idea for you if it’s going to hurt your credit score. So how can you know what the impact will be? Keep in mind the following credit score rules:
- Higher credit limits are better — One of the most important parts of your credit score is the percentage of available credit that you’re using. So having $2,000 in debt and $15,000 of available credit is much better for your score than having $2,000 in debt and $4,000 of available credit.
- Older accounts are better — Your credit score improves based on having a longer credit history. The oldest of your credit card accounts are valuable to your credit score for this reason.
- Credit inquiries are not good — Any time you apply for new credit, including a balance transfer, it will ding your credit score slightly. The negative impact is fairly minor but tends to last for about six months.
The main lesson from all this is that you don’t want to close your old credit card after doing a balance transfer. Even if it has a zero balance, you can leave it open and it will continue to help your credit score (unless it tempts you into spending more, in which case you should just close it!).
3. If you find a good deal, don’t use it as an excuse to keep your debt
No matter what you do with your credit card balance, the only way to take control of it (and save yourself money in the long run) is to pay it off! Doing a balance transfer can certainly help you pay it off, but only if you make a plan and stick to it.
Ideally, you could use the introductory period (when you have little or no interest) to start paying off your balance. Maybe you could even pay it off entirely within one year?
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4. Tie up the loose ends
If you do decide to go ahead with a balance transfer, it’s extremely important that you not ignore your old account. You’ll need to stop any recurring payments that you had set up on that card (such as automatic bill pay), and you’ll need to take that credit card number out of any websites you’ve used to buy things in the past. Then, check up on the old account for 3-6 months to make sure there are no surprise charges or fees that you were not expecting or were not aware of.
5. Be aware that the organizer of Balance Transfer Day is not unbiased
The person who started the Facebook page for Balance Transfer Day was found to have an affiliation with a website that profits from balance transfers. (You can read more about the story here). In reality, you shouldn’t make a decision about transferring your balance based only on a national day of protest. Rather, you should inform yourself and make a decision that protects you and your wallet. If you have debt, you’ll be paying interest to some kind of financial institution no matter what, so it’s wise to keep your focus on minimizing the amount you’re paying and to work toward eliminating your balance altogether. After all, the best way to send the banks a message is to get out of debt entirely!
Have you ever done a balance transfer? If so, did you find it helpful?