5 Things To Know Before You Do A Balance Transfer
It’s not uncommon to end up with multiple credit card bills when you’re trying to build your credit. But if you have a high balance on one card and an offer for a balance transfer on another, which one should you choose? In general, transferring a balance from one credit card to another will save you money. Whether or not it makes sense in any given situation depends on your circumstance.
Read on to learn more about the pros and cons of doing a balance transfer, as well as details you’ll want to know before making the decision. An unbalanced debt load could lead to higher interest rates and make future loan applications more challenging. But with the right combination of timing, strategy, and execution, transferring your balances can be an effective tool in getting back into financial shape.
What Is a Balance Transfer?
A balance transfer is when you transfer your debt from one card to another card with a lower interest rate. This lets you pay off your debts faster and save money on interest in the long run. There are two main types of balance transfers: A balance transfer from one card to another card that you own. A balance transfer from one card to another card owned by a third party. In the first scenario, you can ask your credit card company to transfer your balance to a card with a lower interest rate. In the second scenario, you can get a new card with a lower interest rate and have the balance transferred from the old card.
Making Sense of the FEES
When a credit card company offers to transfer your balance to them at a lower interest rate, they are making a profit by tacking on a fee. This can range from 2% to 5% of the total balance, depending on the card. When you’re comparing cards, also keep in mind that some cards may charge an annual fee, while others do not. When you’re deciding whether to do a balance transfer, you’ll want to factor these fees into your calculations. In general, the longer it takes you to pay off your balance and the higher the interest rate, the more money you’ll end up paying.
The Pros of Doing a Balance Transfer
- You’ll pay less in interest. The interest rates on credit cards are notoriously high, so doing a balance transfer will save you money in the long run. With a lower interest rate, you could end up paying off your debts faster.
- You’ll have one lower payment. If you have multiple credit cards, you may have a hard time keeping tabs on your payments each month.
- You have time to pay it off. Typically, you have a 30-day window after a balance transfer when you have to repay the full amount. If you can pay off the full amount right away, you won’t pay any extra fees. If you don’t pay off the full amount, you’ll have to pay the interest that accrued during the first 30 days.
- You’ll get a fresh start. If you’re trying to get out of debt or start fresh with your credit history, doing a balance transfer is a quick way to get your accounts paid off.
The Cons of Doing a Balance Transfer
- You’ll have to pay a fee. Most credit cards charge a fee for transferring a balance, and the fee is usually a percentage of the total amount you’re transferring.
- You’ll have to settle on a lower interest rate. The credit card company will use your current interest rate as a baseline. If you’re approved for the new card, they’ll use a slightly lower interest rate in their calculations.
- You might have a shorter payoff period. If you have a high interest rate on one of your cards, you’ll probably have a lower interest rate on the new card. If your new card has a shorter payoff period, you’ll have to pay off your debt faster.
- You may hurt your credit score. A balance transfer will ding your credit score, but it won’t cause a substantial drop.
When Does A Balance Transfer Make Sense?
- You have a high-interest card. If you have one high-interest card and a lower-interest card, a balance transfer makes sense.
- You have the money to pay off the full amount. If you don’t have the money on hand to pay off the full amount, you may end up racking up more debt.
- You’re not maxing out your new card. If you have a new card with a lower interest rate, you could max out the card if you’re not careful.
- You can pay it off in the next year or two. If you’re not paying off your balance quickly, you could end up paying a lot more in interest.
When Does A Balance Transfer Not Make Sense?
- You keep your high-interest card. In most cases, you’ll end up paying more in interest if you keep your high-interest card.
- You don’t have the money to pay off the full amount. If you don’t have the money on hand to pay off the full balance, you may end up racking up more debt.
- You can’t pay it off in the next year or two. If you can’t pay the debt off quickly, you could end up paying a lot more in interest.
- You have multiple debts to pay off. If you have multiple debts you’re trying to pay off, a balance transfer works best when you have a high-interest card.
A balance transfer is a good strategy if you have a high-interest card and a lower-interest card. It’s also a good idea if you can pay off the debt in the next year or two, especially if you can put that money to better use. A balance transfer does come with some risks, though. Make sure you can pay off the debt before the new card’s expiration date, and make sure you don’t take on too much debt to do so.