When Is It Good to Do a Balance Transfer Between Credit Cards?
Balance transfer credit cards are credit cards that allow you to transfer your balance from another credit card to a new card without interest on the new card. These cards became extremely popular before the Great Recession as many people saw them as an opportunity to save money and get rid of high-APRs (Annual Percentage Rate). During a time when many families were in debt, this was a way for them to minimize the amounts they were repaying so they could use the difference toward existing ordinary monthly expenses.
These days, balance transfer credit cards still remain an option for people with outstanding debt who are subsequently paying high annual interest rates. If you are thinking of applying for a balance transfer credit card, read on for key points about this potentially debt-reducing tactic.
What Should You Know About Balance Transfer Cards?
Low Interest Rates
The attractive thing about this product is that it offers a low interest rate (sometimes even zero) compared to the classic credit cards you see everywhere. Despite this, you should be careful since many credit companies may offer those low interests for only a short period of time. For example, an introductory 0% APR rate on a balance transfer card could become a 15% rate after 12, 15 or 18 months (these numbers are merely illustrative and are not intended to be based on any actual card offers).
Generally speaking, debt from a credit card, as well as most debts from mortgages or car loans, may be transferred to this secondary credit card in order to save money on interest. In order to do so, it is necessary to have a “very good” or “excellent” credit rating. Otherwise the application for the second card can be denied if the applicant is labeled as a high-risk profile. This can happen if someone tries to transfer debt to a balance transfer card from an already low-rate interest card; this is called a secondary or tertiary debt reduction.
It is important to know that all debt transfers will be liable to pay a fee to transfer the debt, usually a percentage of the transferred amount, for example 3%. The bigger the debt you transfer, the bigger the fee. Also, each credit company sets their own credit limits. This is another important thing to consider when looking for a credit card to transfer the already existing debt, as you need to make sure the new limit is big enough to cover the money you’d like to transfer.
Another key point to bear in mind is that some cards don’t offer the same, possibly advantageous, conditions for new debt. This means that if we use the credit card not just to transfer our existing debt but also to make new purchases, these new purchases might be subject to a higher interest rate.
As said before, these credit cards may be suitable for people who are currently paying a huge amount of money on interests from a high debt. For example, imagine someone needs to pay back a $20,000 credit card bill at an APR of 15%. Under this example, they currently pay $1,916.66 per month to repay a total annual amount of $23,000. After transferring the debt to a lower interest credit card, the monthly payment could be reduced to $1,716,66 per month, and taking into consideration a 3% transfer fee of $600. This means that person could save $200/month and $2,400/year by transferring the balance of their current credit card to a lower interest balance credit card.
A balance transfer credit card might not make a big difference for someone owing a small amount, even if they are paying a similar interest rate, but it is attractive when we talk about big numbers. A warning to anyone thinking of transferring their current debt to a balance transfer credit card while also continuing to use the original credit card to increase debt: this could lead to an unstoppable spiral of debt which could be very difficult to pay off, and as mentioned before, credit companies usually do not allow more debt transfers to high-risk customers.