Consolidating credit card debt with a balance transfer can be an effective means of eradicating an obligation for less money. This is especially true when issuers offer a zero percent interest rate on the amounts you place with them.
However, you must be careful to consider all the different angles to ensure you come out ahead. In other words, it’s important to be careful when evaluating balance transfer credit card offers.
Here are some things you should pay attention to.
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The Amount You’ll Need to Transfer
While it’s critical to make sure the limit the issuer is willing to afford you will encompass the debt you need to eradicate, an even more important concern is whether you’ll be able to pay it off completely while staying within the zero percent introductory period.
The smart play here is to divide the total amount of the debt you intend to transfer by the number of months the issuer is offering at zero percent interest. This will enable you to determine how much you’ll need to be able to afford to pay each month to meet that requirement.
Here’s why—
The Duration of the Introductory Period
Zero percent APR credit card consolidation offers usually have an expiration date. In other words, you have to make sure you pay the entire transferred balance off before the introductory period expires.
In a lot of cases, failing to do so can render you liable for interest charges on the entire transferred amount — calculated from all the way back to when the balance was transferred — even if you’ve paid most of it off.
That can be a substantial amount of money, one with the potential to erase any gains you may have made by accepting the transfer deal in the first place.
Balance Transfer Fees
It is quite common to encounter transfer fees of three to five percent of the transferred balance when you accept one of these offers. That amount will be added to the total of your transfer and yes, it will accrue interest charges right along with the principal if it isn’t paid off before the introductory period expires.
Now, in some cases, this can be worthwhile.
You might actually come out ahead paying the fee if doing so gets you a longer introductory period. Again though, this is assuming you pay the transferred balance — plus the fees — in full before that zero percent rate goes bye-bye.
How Interest Charges Accrue
Credit card APRs often vary according to the type of transaction. It’s entirely possible to have a zero percent rate on your transferred balance, while incurring interest charges of 15 percent or better on purchases made using that same card.
Cash advances can be even higher, which is why they should be avoided.
This means you should track purchases made with that card separately. Frankly though, we also strongly advise against making any credit card purchases until that transferred balance is paid in full— otherwise you’re just digging a deeper hole for yourself.
The Effect on Your Credit Score
Your score is going to dip a bit any time you apply for new credit. Granted, several applications for the same type of credit within a narrow window of time are looked upon as a single inquiry, but the damage happens nonetheless.
With this in mind, it’s important to spend some time evaluating each of the balance transfer credit card offers you’re considering in advance. That way, you’ll find the best card for your situation and minimize the number of applications you submit.
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