If you find yourself in a position where you have incurred quite a bit of debt on high-interest credit cards, balance transfers to a card with a lower interest rate may sound like a great way to save cash. Unfortunately, it is not as simple as it sounds. Let’s examine three things you need to know before making the big switch to a balance transfer credit card.
1. Fees are Inevitable
Although you may like to think it is as simple as making a smooth swap from a high interest rate to a low interest rate, keep in mind that you will almost always be charged a balance transfer fee. This fee is determined as a percentage of the total amount you will be transferring and typically does not have a cap. According to CreditCards.com, in 2015 a typical fee for a balance transfer rung in at three percent. Weigh the pros and cons on how much money you will actually save by transferring your debt.
2. Transfer Rates Expire
Balance Transfers said, “A balance transfer card typically draws you in with the extra-low annual percentage rate (APR) that falls between zero and five percent.” This is just a teaser though, and will eventually expire. After a set period of time, generally ranging between six months to a year, the interest rate will increase in the range of 12 to 18 percent, although it could be even higher. If you make a late payment, rest assured that this teaser rate will quickly change to the “go-to” rate.
3. Good Credit is required to Qualify
Based on Forbes, zero interest balance transfer cards were at their peak before the recession. Once it hit, they become rarer and contained less generous terms. Now that the economy is slowly gaining stability again, they have risen to popularity once more. Unfortunately, the best terms are available only to individuals who have good or excellent credit. If you can qualify, it may save you a significant amount of cash and enable you to pay off your debt sooner.
Overall, individuals need to understand that transferring isn’t the same as repaying. When you use a balance transfer card, you are essentially paying off one credit card with another. The only real benefits that come from this process is saving money over the long haul through paying a lower interest rate and potentially consolidating payments to make things simpler. Furthermore, don’t count on continuously transferring balances from one card to another when the low rates are over. Lenders tend to see this behavior as a risk.
