Spenders beware: It’s about to get more expensive to use your credit card.
The Federal Reserve just raised interest rates for the third time this year, and another rate hike is expected before the end of 2018.
One of the first things impacted by a rate hike will be your credit cards. You could see an increase in your interest rate as soon as your next statement.
If you’re carrying credit card balances, the rate increase can cost you hundreds of dollars in interest charges each month. While paying down these balances as soon as possible is advisable, it isn’t possible for everyone.
For those who can’t wipe out their balances before the interest rate increase comes, a balance transfer could be a smart strategy to save big.
How a balance transfer can save you money
The average interest rate on variable-rate credit cards is more than 17.3 percent, according to Bankrate data. A rate increase of half a percent could add even more to your monthly interest charges.
Most balance transfer cards have an introductory interest rate, which is usually low (between 0 and 5 percent, depending on your creditworthiness).
Chad Rixse, co-founder of Millennial Wealth in Seattle, says these introductory periods can be as long as 12 to 18 months.
“(A long introductory period) gives you extra time to get the balance paid off without interest accruing on it — it means you can do more with less and in a shorter amount of time,” Rixse says.
He recommends finding a card with the longest introductory period as possible — but be sure to have the cashflow on hand.
Once the introductory period is over, the card will have a higher annual percentage rate (APR). A common misconception about the introductory period ending is that interest will be backdated to the original balance, but Rixse says that’s not the case.
“Nothing too dramatic occurs when your 0 percent intro APR period runs out,” Rixse says. “You’ll have to pay interest for every month from then on, but you’re not expected to pay back-interest on any balance, and there are no hidden fees.”
Note that credit card balance transfers may come with an initial fee. Some charge between 3 to 5 percent of the amount transferred.
If your credit is good enough, you could consider transferring the remaining balance to another 0 percent interest card. Keep in mind that opening new accounts affects your credit, so too many inquiries could have a negative impact.
How to make the most of a balance transfer
Finding a 0 percent interest balance transfer card can save you money in interest charges, but only if you use the card appropriately.
It isn’t recommended to continue charging purchases after making the initial transfer to your new card; doing so will rack up a balance that you might not pay off before the introductory period is over. Plus, new purchases on a balance transfer card might not be interest-free, even during the introductory period. Read the fine print before applying for a card.
The most important part of using a balance transfer card is paying off the balance in full before the introductory period ends. If you don’t pay it off, you will end up paying a high APR on that money.
It’s also a necessity to make on-time payments on a balance transfer. If you don’t, the low introductory rate could disappear.
Tips for picking the best balance transfer card
A balance transfer is a strategic financial move. Taking time to review your options is essential to success with a transfer.
Here are a few tips to help you pick the best one.
Consider the credit limit: If your total balance exceeds the limit on the balance transfer card, you’ll now be making two credit card payments each month. Search for a card that can take on your entire balance, making payments more manageable.
Beware balance transfer fees: Unfortunately, you can’t just transfer one card balance to another without incurring a cost. Most balance transfer fees are around 3 percent of the balance transferred. Keep these fees in mind if your credit limit is close to your total balance.
Length of intro period: Be realistic about how quickly you can pay off the balance. If you come across a card you’re interested in but its intro period isn’t a realistic target date for you to pay it off completely, you might want to keep shopping around.
Check out Bankrate’s picks for the best balance transfer credit cards.