Should I Make a Balance Transfer?
Q: My credit card bills are a mess. I pay so much in interest every month and I don’t seem to be lowering my debt. I’m considering a balance transfer to an interest-free card. Is this a good idea?
A: Transferring some of your credit card debt to one that offers an introductory interest-free period can 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.
- Interest-free debt
Obviously, your biggest push for making a balance transfer is to not accrue interest on the debts you’re transferring. Depending upon the offer, you may get a year or more with little or no interest.
If you’re stuck with a high-APR credit card, you can easily be paying upward of $80 a month, just in interest! Making a balance transfer will allow you to take a real bite out of your debt and make progress toward getting rid of it completely. You’ll be saving money and working toward an important goal at the same time.
The more monthly bills you need to pay, the greater the 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 will go down, and it will be that much easier to keep on top of payments.
Too often, people get trapped in a cycle of debt. When they feel like they’re in over their heads, they continue swiping and spending as they please, figuring that another few hundred dollars won’t make a difference to the 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.
- High interest fees and transfer fees
Before making a balance transfer, be sure to do your homework on what the interest rate will be after the promotional period. While Scott Credit Union offers competitively low rates for its credit cards, other companies may hit you with an unusually high rate at the end of a predetermined amount of time with your card. Also, many balance transfer cards do not offer the same low-interest deal for new purchases.
Additionally, 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.
- You need good credit
Unfortunately, many people who need balance transfers the most don’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 credit score.
- Increased monthly bills
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 up 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.
- Negative impact on your credit score
Before a change was made to the VantageScore system in 2017, 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. So, consider closing the first account after you do a balance transfer.
If you find yourself sinking in credit card debt, talk to us about transferring your balance. Or, if you don’t think a balance transfer is the right choice for you, we can also help with a personal loan! Either option may be just what you need to get you on the right track toward debt freedom.
Your Turn: Have you ever made a credit card balance transfer? What can you share from your experience? Tell us all about it in the comments!