Credit card balance transfer: A good idea?
The post-vacation blues have set in, along with hefty credit card debt. Your well-intentioned plans for a summer-within-your-means fell short, and now you're faced with the prospect of paying off your recent spending -- plus 15% interest -- for the next six months or longer.
There might be a better way.
A credit card offer that features a low- or no-interest introductory period on debt transferred from another credit card can be an efficient way to vanquish a large credit card balance over time without shelling out any (or very little) interest.
"If you can really keep yourself on a budget ... (a balance transfer credit card) can be a useful tool" for paying down debts, says Thomas Nitzsche, a certified credit counselor with ClearPoint Credit Counseling Solutions, a nonprofit organization in Atlanta.
But if you're simply transferring balances from card to card, the new one won't eliminate your debt woes. In fact, you could wind up exacerbating them because balance transfers often involve fees and could carry high go-to interest rates once the introductory period is over.
"If you've noticed a pattern ... you need to take additional steps" to get rid of your debts for good, Nitzsche says.
Do the math
Before jumping at an offer, read the fine print and calculate the costs. The key figures are the introductory interest rate, the length of the introductory period, the annual percentage rate (APR) after the intro rate, the balance transfer fee, and the minimum monthly payment, says Mary Ellen Nicol, also a counselor with ClearPoint.
Under federal law, the teaser rate must last at least 6 months. Many balance transfer credit cards will offer introductory rates for longer periods, anywhere from 9 to 18 months or sometimes even longer, says Nitzsche.
Be realistic in determining how long it will take to chip away at the balance. Will it take longer than the introductory period? If so, then the math gets a little more complicated. Now you need to consider what the interest rate will bump up to after the teaser period ends and how much you will pay in interest on the remaining balance.
Don't forget to add in the cost of the balance transfer fee, which is typically around 3% of the balance. Also factor in what the new card's minimum monthly payment will be; often, it's a percentage of the balance transfer.
"If the fees are too high, the length of the low interest rate period too short or the minimum payment too high for your budget, then it becomes an unwise financial move," says Nicol.
Can I qualify?
Even if all the numbers pan out in favor of a balance transfer, you still have to qualify. That means you should have a good idea of what your credit looks like before applying.
"Pull a copy of your credit report" about 6 months ahead of time, says Bruce McClary, vice president of public relations and external affairs with the National Foundation for Credit Counseling.
You can get a free credit report from myBankrate.
Those with stellar credit (750 or above) will likely qualify for the best teaser rates. If your credit score falls below that, you may get a higher teaser rate, but it still may be lower than what you're paying now.
"You have to set your expectations within the realm of reality," McClary says.
The other factor is the credit limit. There's always a chance the new issuer won't dole out a large enough credit line for you to transfer your entire balance, says Linda Sherry, director of national priorities at watchdog group Consumer Action.
Check the fine print to see if there is a cap on the balance transfer amount. Otherwise, you may not find out if your new account will be able to swallow your balance until after the account is opened, Sherry says. Then you'll have 2 credit cards you need to pay off.
"Banks are not giving out high credit limits these days, so if you have a sizable balance, the chance you'll be able to move it over in its entirety is pretty slim," she says, "unless you're an absolute stellar credit score."
Still, moving only a portion of high-interest debt to a low- or no-interest account could make it easier to pay off the debt without incurring a lot of interest, Nicol points out.
Living with a transfer
You qualified for the balance transfer and moved your debt to a no-interest account. Now what?
Make sure the old card has been paid off by getting a statement from your old issuer. Sherry recommends keeping the old card open, charging very little each month (such as gas) and paying off the balance in full. That will help boost your credit score while you pay down your debt. If a balance still remains on the old card, continue to make payments on time.
Meanwhile, attack the balance transfer debt before the introductory period is up. And make sure every payment gets in on time. If you fall behind by 60 days, your low or no interest rate could disappear, says Nicol.
Last, realize that purchases on the new credit card may fall under a different APR than your balance transfer debt. If the rate is higher, avoid making purchases on the card because your payments will apply to the balance with the highest rate first.
People who don't utilize these best practices risk digging a deeper hole for themselves.
"They've just doubled the amount of debt they are dealing with in a short amount of time and then the debt becomes unmanageable," McClary says. "Hold your feet to the fire when it comes to paying down that balance so you don't get burned later."