A credit card balance transfer is the relocation of money owed from one credit card account to another. Credit card companies offer balance transfers as a way to entice new clients. Used appropriately by consumers, balance transfers can provide a wide range of financial benefits, but unfortunately, there’s also great potential for abuse. Credit card balance transfers are for those in dire straits, they are not how to save money but they are a way to minimize a disastrous financial situation. Here are some of the dos and don’ts of credit card balance transfers.
You Must Have Good Credit
Balance transfers are often seen as a way to manage debt, which is true to a point; however, it’s important to note that the option isn’t available when there’s a debt problem. Credit card companies only extend these offers to consumers with good credit.
You Can Use New Cards to Pay off Old Ones
This is a last ditch effort to save your credit score if one card is about to put you in a crippling financial state. In fact, the credit card companies want that debt, which is the reason they made the offer. The transfer may not be the reason you opted for the new card, but if the new card has a lower rate, then it would be financially irresponsible not take advantage of it.
A Cyclical Approach Has a Negative Effect
It’s possible to use a series of balance transfer to move debt along and thus avoid interest. That plan will catch up with you, however. Each time you open and close a credit card account, it has a negative effect on your credit score. In isolation, that effect is minor, but when a pattern forms, it’ll affect the credit to the point that transfers will no longer be available.
Your aren’t Limited to Credit Card Debt
Balance transfers aren’t limited to just credit card debt. In fact, you can transfer nearly any kind of debt. Credit companies will usually include blank checks at the time of transfer, and you can use those checks to pay off bank loans and other types of outstanding financing.
Balance Transfer Fees are Likely
Acquiring fee-less balance transfers prior to the recession was relatively easy, but this isn’t the case any longer. Nearly all transfers will have some type of fee associated with them, and you need to factor in that amount when evaluating the lucrativeness of the option. If you have very good credit, the company may waive the fee as long as you meet certain conditions, such as keeping the account active for x number of years.
Transfer Rates May Not Apply Across the Board
Read the fine print. The credit rate for transfer is usually limited to the transfer amount, which means that any new balance will be calculated at the default rate for the account. In addition, the special transfer rate may be limited to certain types of transfer. In order words, your car loan may not be a valid transfer for the special rate.
Transfer Rates Do Expire
Transfer rates are not permanent and will have an expiration date. When that expiration date occurs, the remaining balance is charged at the default rate and may even be charge retroactively. Be very careful when paying off your debt that anything beyond the minimum payment is actually going toward the balance transfer first.
Balance transfers can be a highly effective way of simplifying and consolidating debt. If you see debt problems on the horizon, then a transfer can be an excellent preemptive strike. However, if you don’t change your spending and saving habits, the debt will eventually catch up with you.