Almost every day, offers come in the mail that encourage people to transfer their balance to a new credit card. Moving a high credit card balance to a card with a lower interest rate can be very attractive. However, after reading the fine print, it may not add up to be such a good deal after all. So, here are five things to consider when deciding to transfer your credit card balance.
What Is the Balance Transfer Introductory APR? How Long Will It Last?
Credit card balance transfer (BT) introductory annual percentage rates, or intro APRs, can be as low as 0 percent. These intro rates, also known as bait rates, are extremely attractive when the rate on your existing credit card is in the high double digits. Intro APR periods usually range from 6 months up to 18 months—and sometimes longer.
Make sure you know the time frame of the intro rate to determine if you will be able to pay off or significantly pay down the balance within that period. If you are able to pay a significant amount of the balance during that time, you can save hundreds of dollars that would have been paid in interest payments.
What Is the Real APR?
The credit card’s APR may increase drastically after the introductory rate has ended. Make sure the APR will not be higher than the rate you are currently paying. Having a large balance at a higher rate would hurt your budget more in the long run than it would keeping your existing card. Some credit card companies increase the APR or have a penalty APR if a payment is missed or is late. Look for that information to determine how high the rate could go.
Is There a Balance Transfer Fee?
Some great BT offers that have really low or zero percent introductory rates may come with a fee. Transfer fees are typically around 3 percent of the balance. Don’t forget to check if there is a fee and add this amount to the cost of doing the balance transfer.
Do I Qualify?
Most BT “offers” are offers to apply for the credit card. Credit card companies determine eligibility for the credit card and the amount of the credit limit based on your credit report, your ability to pay based on your income, and other factors. If you are performing a balance transfer from only one card, make sure you are approved for a credit limit that will allow you to transfer the entire balance or a significant amount from it. If you are approved for a lower credit limit and you have multiple credit cards with smaller balances, consider transferring as many balances as you can. Avoid adding more debt, and refrain from using the cards that were paid off.
How Will It Affect My Credit?
The balance owed on revolving debt, like credit cards, affects 30 percent of the credit score. Therefore, the credit score may drop a few points after you have performed the balance transfer, especially if the existing cards are closed. If the balance on the new card is more than 50 percent of the credit limit, try to avoid closing or using the credit cards you just paid off. Also, making payments on time every month will establish a good payment history and positively affect 35 percent of your credit score.
Now it is time to sit down with a calculator and do the math before you decide to do a transfer, or call for credit counseling to make sure your decisions are financially sound.
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