Are Balance Transfers for You?
Thinking about opening a new credit card with an attractive balance transfer offer? Before making the move, it’s important to fully understand what a balance transfer is and how to spot the best offer to fit your financial situation.
A credit card balance transfer allows you to move the balance from one card to another, typically from one with a higher interest rate to one with a lower interest rate. If you’re working to pay off debt, this can be a great way to cut down, or even completely eliminate interest fees. Consolidating all your debt by transferring the balances of several credit cards into one can also cut down your monthly payments.
Things to Look for in a Balance Transfer
All balance transfers are not created equal. Before choosing a card to complete your balance transfer, it’s important to do your research to make sure you’re actually getting a good deal. Take the following criteria into consideration before making a balance transfer:
- Introductory Rate: Credit card companies often lure customers in with a zero-to-very low interest rate and then the rates dramatically, which results in higher rates than you were paying on your old cards. If you can’t pay your debt off during the introductory period, you may want to pass on these offers.
- Include Both Purchases and Balance Transfers: While it’s great to get a low interest rate on balance transfers, you also want a card that allows you to maintain the same benefits for purchases. Make sure the low interest rate is applicable to both your purchases and your balance transfer.
- Types of Debt Eligible for Transfer: If you’re shopping for a balance transfer to consolidate several debts into one, look for a card that allows more than just credit card balance transfers. Some cards allow you to transfer vehicle loans, personal loans and other balances too.
- Transfer Fee: Moving one credit card balance to another isn’t cheap. There’s a chance you’ll be charged a transfer fee, which is typically either a flat fee or roughly three percent of the total balance. So let’s say you want to transfer a $5,000 balance with a 3 percent transfer fee—that will cost you $150. Make sure the savings you will incur is greater than the transfer fee associated with the card. This is even more important if you’re planning to transfer multiple balances to one card, as you may be hit with a fee for each balance transferred.
- Terms and Conditions: Don’t let offers for low balance transfers blind you from other not-so-great terms and conditions associated with the credit card. For example, it’s important to make sure you won’t be charged an annual fee and that the card has good fraud protection coverage. Shopping around for a great card can allow you to keep it for years to come, even after you’ve paid your balance off.
- Credit Limit: If you have a high credit limit on your current card, there’s no guarantee a new card will offer the same. You probably will not know your new credit limit until after you’ve already applied and have been accepted for the card, so you may end up with less available credit than you currently have. If this happens, make sure your new card has enough available credit to handle both your balance transfer and the transfer fee.
Credit Report Impact
Transferring the balance of a credit card with a high-interest rate can do wonders for your finances if done properly, but it’s important to note that this can have a negative impact on your credit report. Closing a high-interest credit card decreases your amount of available credit, which can lower your credit score. If you’re planning to apply for a new loan in the next year, you may want to consider keeping the account open to keep your credit score from taking a hit.
When to Use Caution
If you’re having some financial difficulties, a balance transfer may seem like a great way to free up space on an existing credit card for new purchases. However, this can potentially be dangerous for your finances. While it may help you to cover expenses in the short-term, you’ll only be digging yourself into a deeper financial mess. Balance transfers should be used as a way to pay down debt, never as a free pass to incur more.
When shopping around for balance transfers, it’s important to take the time to find a card that offers a real value. Don’t let super low interest rates blind you from other terms and conditions that may actually worsen your financial situation.
Ask a Baxter Credit Union representative for more information on their credit card and balance transfer options.
This article was written by NerdWallet.
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