Pros and Cons of Balance Transfer Credit Cards
That offer to transfer your credit card balances sounds like a pretty good deal, doesn’t it?
And it is, until you take out your magnifying glass and start reading all the fine print that goes along with the offer.
What a lot of people don’t realize is that the lender making such an unbelievable offer wouldn’t be doing so if there wasn’t some way to benefit financially. These lenders actually feel safe in assuming that most people transferring balances won’t pay attention to the potentially costly details that accompany the offer.
Transferring balances from a high-interest rate credit card to one with no or a lower interest rate can save you a substantial amount of money if you don’t fall victim to these common mistakes.
1. Balance transfer fees
Rare is the balance transfer offer that doesn’t come with some sort of balance transfer fee. It might be a flat rate like $50 or $75 but it’s usually a percentage of the total amount of each balance transferred. Maybe 3% doesn’t sound like much but if you’re transferring several thousands of dollars, that fee can be hundreds of dollars!
Although you may know by now to look for such fees, there’s something else you need to look for: whether or not there’s a cap on how high the balance transfer fee can go. Avoid those without caps. Before taking advantage of an offer, always do the math. If the balance transfer fee ends up being more than you would have paid in interest had you not done the transfer, then don’t transfer!
2. Other interest rates
While there might be low or no interest on balance transfers, you’re still getting a new credit card which means you’ll still be able to use it to make purchases. Purchases though, normally aren’t part of the no or low interest deal. In fact, you can expect the interest rate on purchases or cash advances to be just as high as or higher than the credit cards you’re already using to make purchases. If you’re serious about chipping away at your debt, which is really the best reason to take advantage of balance transfer offers, then you really should stop accruing credit card debt!
3. Payment allocation
If you do transfer balances to the new account, and you do make purchases on this new credit account, you may be surprised to find that your payments are not allocated the way you thought (assumed) they would be. Say you transferred $1,000 and during the last month you made new purchases totaling $200. You make a payment of $300 thinking you’ll clear away the new charges and start chipping away at the balance transfer amount.
Next billing cycle you get your statement and find that the $200 in new purchases is still there – plus the couple of new charges you made since then. And all those purchases are compounding interest at a rate of 16, 19, 22% or more! What happened? Well, as stated in the fine print, the credit card company allocated your entire payment to the zero interest balance because – well it’s not making any money on that amount. But it certainly is on those new purchases!
4. Interest rate after intro rate expires
That low or zero interest rate won’t last forever and you need to know how much it’ll increase when the stated period expires. That’s because any balance remaining afterwards is likely to be whacked with a much higher rate. To keep this from happening – which negates any savings benefits you’ve reaped so far – make sure you have a plan for paying off whatever balance you transfer before the rate increases. Also make sure you don’t miss a payment or make payments late. If you do you might find – without warning – that your zero percent no longer applies and you’re paying more in interest than you were before.