At the beginning of the year, many consumers want to reduce or eliminate lingering credit card debt. One of the best ways to accomplish that goal is to take advantage of a low-rate, credit card balance transfer offer. A balance transfer is just what it sounds like: a transfer of an existing balance from a higher-rate credit card to one with a lower rate. Reducing the interest rate lowers the dollar amount paid on an outstanding balance. But eliminating fees is also an important ingredient in lowering expenses. What do smart consumers need to know?
One of the most important features of any balance transfer offer is whether or not there is a fee for the transaction. Believe it or not, some credit card lenders charge a 3-5% fee of the transferred amount. That means, a $5,000 transfer to a card with a 5% transfer fee will cost $250. So now, the new debt is $5,250 which increases the amount of time required to pay it off. The goal is to pay off your debt, not add to it! The promotional rate may be very low or even zero, but increasing the debt just to pay it off at a lower rate doesn’t make a lot of sense.
Review the Rates
Yes, rates is plural because there will be two interest rates when you take advantage of a balance transfer offer. The first rate is the promotional rate. Typically, this interest rate is significantly lower than the transferred balance rate and lasts for a limited amount of time. Be sure you know the interest rate in effect at the end of the promotional period. When the promo period is over, rates can climb to upwards of 20-30%. Most consumers won’t pay off the entire transferred balance during the lower-rate promotional timeframe, so the unpaid balance converts to the ‘fully loaded’ interest rate which increases the cost of credit and lengthens the amount of time required to pay it off. It’s no deal and consumers should be wary.
Balance to Limit Ratio
If you are applying for a new credit card, request a credit limit that is double the amount you want to transfer. For example, if you want to transfer a $5,000 balance be sure to request a credit limit of at least $10,000. When the balance on a credit card account is over 50% of the credit limit it can have a negative effect on your credit score. Transferring a balance is not just a way to pay off debt but can be a way to improve your credit. Consider all the costs and benefits before you accept an offer.
If you’re looking for a card that has no balance transfer fee, a low-rate balance transfer offer, and a low post-promotional rate…look no further than our Visa Platinum Rewards card.