It’s a common strategy for some credit card holders to transfer the existing balances on their higher-interest cards to another card with a lower rate or 0% APR. The balance transfer card is a double-edged sword, helpful in slashing down your debt yet could hurt your score or finances if you let your guard down.
A Balance Transfer Card
In the face of a $779-billion debt in total credit card balances for the last quarter of 2016 alone, paying down credit card debt is no easy matter even among the most disciplined set. Balance transfer cards intend to help you with that problem. It allows you to move your existing credit card balances and consolidate them into a single credit card.
Perks and Pitfalls
What makes a balance transfer card attractive to consumers is having these features, mainly:
- 0% introductory APR on balance transfers for a certain period, e.g. 15 months
- 0% transfer balance fee for a set period, the first 60 days of account opening
- 0% penalty for missed payments
- 0% annual fees
Its usual pitfalls, something that you should be aware of, include:
- Variable rate as the 0% intro rate expires.
- Transfer fee that moves along with the balance being transferred
- Transfer fee for foreign transactions
- Annual fees
To illustrate, you have an existing balance of $1,000 with six months to pay at 12.5% APR. You transfer that amount to your card with 0% intro rate and pay 0% transfer balance fee if you’ve made the move within the first 60 days.
Under the balance transfer card, you can repay the $1,000 debt at 0% interest for the six months. This is in stark contrast to the 12.5% that will be charged to your every repayment.
What happens after the intro rate expires? Your card will revert to a variable rate and you will start paying whatever balance on the card based on the going rate.
As to the transfer balance fee, you will incur it as soon as the no-transfer-balance-fee ends. The fee is often a percentage of the amount being transferred or a set dollar amount by the bank, whichever is greater. The higher the balance being transferred to the card, the higher the fee will be.
In essence, a balance transfer card works to help you pay down your debt especially if you are burdened by higher interest rates and fees and can’t keep track of your due dates and minimum payments. The savings you get from paying your debt at a lower interest rate for debt represent its greatest benefit.
It’s a great tool to consolidate credit card balances and other instalment debts like car loans, personal loans as permitted by the issuer. This makes for easier tracking and unified repayment.
Be careful with purchases on your balance transfer card though. Clarify with the card credit company if new purchases are included in the zero-percent intro APR. Otherwise, you have to pay back the purchase debt at a separate rate.
Paying for both purchases and balance transfers on a balance transfer card is also tricky. The minimum amount paid will go first to the debt with the lowest rate and the rest to the higher-rate one. This could mess up the repayment terms of each debt.
It may be wise to stick to balance transfers when you have one for a card. It’s also a bad idea to open a new balance transfer card so you can avail of 0% APR. You are basically moving your debts from one card to another and not repaying them.
Your FICO score will take a hit for carrying a higher level of debt and opening new lines of credit in a short span of time. Good credit is something you need to qualify for a balance transfer card.