If you’ve got a large balance on a credit card bill with a high interest rate, it might make sense to transfer your balance to a new credit card that has a lower or even zero introductory interest rate. Once you’ve completely moved your outstanding charges from your old credit card to your new card, you’ll no longer make payments on your old card. Instead, you’ll pay off your credit charges under the terms of the new card. You could potentially save money on your interest charges and pay off your credit card debt sooner.
However, credit card balance transactions can be tricky. Take into account all the financial factors to choose the best card and to avoid making a costly mistake. Consider the six topics below so that you can choose the right balance transfer credit card to help you minimize your debt.
1. Check Your Credit Score
Before you apply for any type of credit card, you should check your FICO credit score. The vast majority of major lenders consider your FICO score when they decide whether to lend you money, and that includes companies issuing credit cards. If you don’t have excellent credit, it’s likely you won’t qualify for the cards with the optimal credit card balance transfer terms and conditions.
2. Don’t Apply for Too Many Cards
If you apply for many different credit cards, trying to get the best deal, potential lenders might interpret that as a sign that you’re in financial trouble. Apply for a select few cards that offer the best terms and for which you’re most likely to qualify.
3. Watch Out for the Regular Interest Rate
Although your introductory annual percentage rate might be in the single digits or even zero, the regular or default interest rate after the honeymoon period is over will be significantly higher. Depending on your credit score, the APR might be between 10.15 percent and a whopping 25.24 percent, and that rate will vary from month to month.
Closely read the fine print of the credit card agreement. You’ll need to determine whether the regular APR applies only after the introductory period expires. Instead, it might apply to any new purchases you make using the balance transfer card during that period.
4. Get a Long Introductory Period
Introductory periods can range from nine to 21 months. You want to take advantage of your lower credit card APR for as long as possible. This strategy gives you the most time to pay off your transferred credit card debt before the rate increases.
Make a note on your calendar a month or two before the introductory period expires so you can make sure you’re in good shape to pay off the balance of your credit card debt. Otherwise, the interest rate might skyrocket on your remaining balance — which defeats the purpose of switching to a less expensive balance transfer card.
5. Consider the Balance Transfer Fee
Lenders don’t make money by giving it away. Usually, there’s a fee you pay to transfer credit card balances to a new card. The fee is based on the amount of the lump sum that you transfer and it can range from 3 percent to 5 percent, and there might be a minimum fee of $5 or $10. You’ll need to calculate whether the amount of the fee is going to cost you more than the lower interest rate on your new credit card will save you in the long run.
Some credit card balance transfer offers feature a 0 percent fee. Certainly it’s attractive to get “free” money, but there’s always a catch. The introductory period for paying off your debt might be short and then the interest rate could increase dramatically after that period. Transferring your credit card balance without being charged a fee won’t save you any money if you don’t wipe out the debt in time.
For example, if you transfer your existing $5,500 balance to a new card with a 12-month, 0 percent introductory interest rate and a 3 percent transfer fee. If you pay it off in a year, your total payments will be $5,665.
Now, suppose instead after 12 months you paid only $3,000 instead of $5,665 and your regular APR jumped to 15 percent. If you pay only the 5 percent minimum payment, it would take you an additional 80 months to pay off the balance of $2,665, plus you’d pay over $3,500 — in addition to the $3,000 you already paid. Paying $6,500 over a period of more than seven years is worse than paying off the entire debt of $5,665 in a short 12-month period. Plus, this calculation assumes you incurred no further debt on that credit card.
6. Find a Card With No Annual Fee
All credit cards fall into one of two categories: those that charge an annual service fee and those that do not. You might not want to pay a fee just for the privilege of carrying a bit of plastic in your wallet. Look for a credit card that has no annual fee. Otherwise, you risk adding an expense that might help wipe out the cost savings of transferring your credit card balance to a new card.
7. Always Pay on Time
It’s important to pay your credit card bills on time, every time, to maintain a good credit score. However, if you pay your bill late during the introductory period of your balance transfer, you might have bigger problems. It’s possible that the low APR will revert to a higher interest rate. You should always plan on paying all your bills promptly, but read the fine print of your credit card agreement to find out the consequences for paying late.
Choosing the Best Credit Cards for Balance Transfers
Choosing the best credit cards for a balance transfer is complex. You have to weigh the financial benefits of paying off credit card debt using your new card versus the old one. You also have to be self-disciplined. If you routinely make late payments or don’t pay off the balance during the introductory period, the APR might be higher than the APR on your original card. Your credit card balance transfer could cost you more than if you never transferred your credit card debt if you’re not careful.
On the other hand, if handled properly, you can potentially save yourself a lot of money. Consider the tips above so you can find the best balance transfer card to pay off your credit card debt.
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