Charging purchases to a credit card can be a great way to earn rewards and discounts on the things you buy but a high interest rate can quickly eat up any savings you earn. Transferring your balances to a card with a lower rate can help you pay your debt down faster, boost your credit score and help you hang on to more of your hard-earned cash but you have to know how to play the balance transfer game.
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How Balance Transfers Work
Say you’ve been carrying a balance on a credit card with an APR of 18%. The debt is really starting to add up, and you’re getting worried. What if there were a way to take that debt and give yourself some time to pay it off, all while paying a low or nonexistent interest rate? Well, that’s the definition of a balance transfer. You transfer debt from one credit card to another, paying a new interest rate on that debt. Your new credit card company pays off your old credit card debt and transfers it on your behalf. You start paying off the old debt with the new company and have no further obligation to your old credit card company. Sometimes, credit card companies attract new customers by offering 0% APR on balance transfers for an introductory period. Ideally, you would pay down your transferred balance in that time frame, before the rate increases.
Do Compare Offers
If your credit’s good, your mailbox is probably full of balance transfer offers from credit card companies who are trying attract your business. Even if you get an offer that seems like a good deal, it’s still a wise move to do some comparison shopping to make sure you’re getting the lowest rate.
The easiest way to compare balance transfer deals is to check out credit card comparison sites. These sites typically feature the most up-to-date information on balance transfer rates and they make it easy to compare multiple cards at once. Some of the things you’ll want to look at include the introductory rate, how long the promotional period lasts and whether the rate applies to just transfers or new purchases as well.
Do Add Up the Costs and Fees
Transferring your credit card balances doesn’t just benefit your bottom line; it’s also big business for credit card companies who typically charge a fee for this service. Depending on the card issuer, you may have to cough up anywhere from 3% to 5% of the amount you’re transferring. If you’re transferring a balance of $2,500, that adds up to a fee of $75 to $125.
Paying a fee to transfer a balance effectively increases your debt so you have to consider whether it’s worth in terms of the amount you’ll save on interest. Aside from the transfer fee, you’ll also need to look at whether the card carries any other costs. Forking over $50 or $100 for an annual fee to get a lower interest rate may not be worth it in the long run.
Do Consider the Time Frame
Like all good things, balance transfer offers must come to an end. Thanks to the 2009 CARD Act, credit card companies have to extend promotional offers for at least six months but you may be able to find a deal that lasts for 12, 15 or even 18 months. After that, you’ll be stuck paying the regular rate on whatever’s left of your balance.
The biggest danger of transferring balances is not being able to pay off the debt before the promotional period ends. When you’re looking for the right card, pay close attention to how long you have to knock out the balance. If you’re not sure that the timetable fits your budget, it could end up costing you hundreds or even thousands of dollars in interest later on.
Don’t Close Those Old Accounts (Yet)
Once you’ve transferred your balance to a new card it’s tempting to close the old account but that can actually work against you. Fifteen percent of your FICO® score is determined by the length of your credit history and the longer you’ve had your accounts open, the better. Closing one or more cards after a balance transfer dings your score in a number of ways.
All of your credit accounts are used to determine the average age of your credit history. When you close an older account it ages your history down, making it look like you have less experience than you actually do with managing credit. The other drawback of closing an account is that it negatively affects your credit utilization ratio. This simply means the amount of debt you have compared to your overall credit limits. The higher the ratio, the more it lowers your credit score.
Don’t Apply for Multiple Cards
Applying for several balance transfer offers may not seem like a big deal but you’re actually hurting your credit every time you fill out an application. Inquiries for new credit make up 10% of your FICO® score and the more inquiries you have over a short period of time, the more risky you appear to lenders. Generally, the better your credit score is the fewer impact inquiries have but it’s still a good idea to keep them to a minimum when you’re shopping around for a balance transfer deal.
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