Balance transfers have long been an option for providing some relief from high-interest rates. Credit card issuers offer balance transfers to cardholders to increase their balances. If you know what to look for, you can save hundreds of dollars in interest.
The pros of balance transfers are simple. You can immediately reduce your monthly finance charges. This saves you money while allowing you to apply more of that same monthly payment toward the principal balance. This can help you pay down the balance faster.
Cardholders who need the most relief from high-interest rates rarely are eligible for reasonable balance transfer options. Instead, the only offers they tend to get have high balance transfer fees or very short terms on a promotional rate. In addition, only those with excellent credit scores are eligible for the better rates. If you have significant balances, your credit score has likely been negatively affected, which will hinder your chances for good balance transfer offers.
Another problem is that the rates are not guaranteed. If you miss a single payment on that or any other credit card that you hold, you can lose the preferred rate on your transferred balance. This is known as universal default, which is spelled out in a clause within the terms of your credit card agreement. Your interest rate could rise to the default rate, which can be as high as your state’s limit.
What to Look For:
- Make sure the interest rate is at least 3-5 percentage points lower than you are incurring.
- Even if your minimum payment requirement drops, you should increase your payments or at least hold them steady.
- Your good credit rating and ability to pay more than the minimum payment will provide you with better transfer offers.
You Should Avoid:
- Teaser rates: Offers lasting less than 8 months are of little value unless you can pay the amount off during that time.
- High balance transfer fees: These can cost you dearly by immediately increasing your transferred balance by a full 3-4%.
- Frequent balance transfers: Too many transfers can lower your credit score and ruin future transfer offers.
- Required purchases: Some transfer offers require a minimum number of purchases to preserve the lower rate. Any purchases will incur a much higher interest rate.
If you are considering using balance transfers to get lower rates, make sure you evaluate each offer to ensure that you are actually improving your chances for eliminating your debt. Remember that you cannot borrow your way out of debt. Balance transfers can be effective only if they help you reduce your debt balances.
Questions about balance transfers can be fielded by our Accredited Financial Counselors.