Is transferring a balance in your best interest?
When you’re fighting piles of credit card statements and it’s becoming increasingly difficult to make more than the minimum payment, a balance transfer may start looking like a pretty good idea. Interest-free payments thanks to a zero percent introductory rate? Yes, please.
But before you call your lender, you should understand that transferring a balance to a new credit card might not always be in your best interest. Otherwise, everyone would jump on the bandwagon. Before making your decision, weigh in the below considerations to make a more informed choice.
1. Length of introductory rate
The goal of a balance transfer is to pay off your debt in full before the zero percent rate ends. For this reason, make sure your balance and the length of the teaser rate are compatible. If you’re trying to rid yourself of $6,000 in debt, a card with a zero percent introductory rate that lasts 24 months may be a good deal. Your $250 monthly payments may be manageable and would still allow you to put money into savings. However, if you’re trying to pay off the same balance and your intro rate only lasts six months, you may have more difficulties making a $1,000 payment while meeting your other needs.
Lenders profit from interest charges, so if they are offering you a zero percent rate, it’s likely a transfer fee applies. Most fees average three to five percent of your overall balance. While a fee should not be the sole reason you dismiss a card, it’s important to make sure that your fee is not unreasonable. For example, if a card carries a three percent fee and gives you 24 months to pay your balance at zero percent, this is a fair offer. However, a card that imposes a 5 percent fee for six months of no interest can be costly if your balance is high.
3. Rates and penalties
Lenders who provide low rates expect to receive timely payments, and a single late payment may prompt lenders to impose penalties and revoke your zero percent intro offer. For this reason, it’s not only crucial to automate your payments, but also to determine what the standard and penalty rates are.
4. Application of teaser rate
Most balance transfer credit cards only apply teaser rates to the amount you transfer over, rather than new purchases made with the card. Standard rates may apply to transactions and purchases. While you are paying off your debt, it’s best to avoid making credit card purchases, but keep in mind that if you do, you may be charged interest.