Should I Make a Balance Transfer?

Q: My credit card bills are a mess. I pay so much in interest every month and my debt doesn’t seem to get any lower. I’m considering a balance transfer to an interest-free card. Is this a good idea?

A: Transferring credit card debt to a card that offers an introductory interest-free period can definitely help you move toward a debt free life. However, there are some things you’ll want to be aware of first.

To help you make the right decision, read on for a list of the pros and cons of balance transfers.

Pros

1. Interest-free debt

Obviously, the biggest push for making a balance transfer is to stop accruing interest on the debts you’re transferring. Depending on the offer, you could get up to 21 months with no interest. It’s especially beneficial to move toward an interest-free balance when the Federal Reserve has recently hiked the interest rate.

If you’re stuck with a high-APR credit card, you can easily pay upward of $80 per month in interest alone! Making a balance transfer will allow you to take a real bite out of your debt and make more progress toward getting rid of it completely. You’ll save money and work toward a very important goal at the same time.

2. Convenience

The more monthly bills you need to pay, the greater your chance of missing a payment. A balance transfer may allow you to consolidate the balances of several different cards into one. This way the number of monthly payments goes down, and it will be that much easier to keep track of all your payments.

3. Motivation

Too often, people get trapped in a cycle of debt. When they feel like they’re in over their heads, they continue to swipe and spend as they please, figuring another few hundred dollars won’t make a difference to their already huge mountain of debt.

Many people find that taking this significant step toward paying down debt motivates them to be more careful with spending habits. After all, you aren’t trying to get rid of your debt just so you can rack up another bill.

It can also be extremely helpful for you to calculate how quickly you may be able to pay off your debt. Having a clear finish line in mind can make the discipline it takes to get there a little more bearable.

Cons

1. High interest rates

Yes, you read that right. The appeal of an interest-free credit card is what draws you into making a balance transfer in the first place. However, at the end of a preset amount of time — anywhere between 6 and 21 months — your new interest rate may be unusually high. While you may plan to pay down your balance before the new rate kicks in, circumstances may dictate otherwise and you’ll find that you’re unable to make even minimum payments. Similarly, if you’re only doing a transfer for a year-long reprieve from interest, you’re essentially treading water without making any progress on your debt.

Also, many balance transfer cards do not offer the same interest-free deal for any new purchases you make on the card after the transfer. If you plan on using this card for day-to-day purchases, you may bite off more than you can chew.

2. Transfer fees

Most balance transfer offers charge a minimum of 3-5% of the balance you’re transferring in exchange for assuming that balance. While this fee may be nominal in the face of the interest you can save, it’s important to note that balance transfers are not usually free of charge.

3. You need excellent credit

One of the biggest problems with balance transfer cards is that those who need them most won’t qualify. This is understandable, of course — the new credit company doesn’t want to wind up paying for delinquent credit card bills. But if you’re considering a transfer, bear in mind that you usually need to have a good-to-excellent credit score, one of at least 700.

4. Increased monthly bills

Too often, a company offering to accept interest-free balance transfers will only accept a portion of your balance. Or, your original credit card company may not allow your entire balance to be transferred because they don’t want to lose out on all that interest. This means you’ll be adding one more monthly bill to deal with. This can complicate your money management and increase your chances of missing a payment — something you always want to avoid.

If your entire balance is not transferrable, always give priority to your interest-free payment but do not neglect your other bills. Missing a monthly payment can really hurt your credit score.

5. Negative impact on your credit score

Until the recent changes to the VantageScore system, having lots of available credit was considered a good sign. Now, though, having less credit while still using a small percentage of your available credit is considered the smarter choice. Opening a new card without closing an old one means you will have more credit available and may actually lower your score. Also, having lots of open cards will make lenders view you as a risk, making it more difficult to qualify for auto loans and the like.

If you find yourself sinking in credit card debt but don’t think a balance transfer is the right choice, we can help! A debt consolidation loan may be just what you need to get you on the right track toward debt freedom. What is a debt consolidation loan, you ask? Click here to learn more about debt consolidation.

Call, click, or stop by Education First FCU today to find out about our competitive rates and other loan options.