7 pitfalls that can trip up your balance transfer
By Dawn Papandrea
June 9, 2016
If you aren’t making progress paying down a balance on a high interest credit card, you might benefit from a balance transfer credit card with an extended 0 interest period and lower interest rate.
“The best reason to try to transfer any credit card balance over to a lower interest rate is so you can save money and get the debt paid off faster,” says Mikel Van Cleve, personal finance advice director at USAA.
However, opening a balance transfer card and successfully completing a balance is only the beginning. Oftentimes, despite having the best of intentions, consumers end up putting themselves in a tougher spot.
Here are seven common pitfalls that can trip up balance transfer card users:
1. Being out of touch with reality.
“If you are really struggling to make minimum payments or are carrying a very large amount of debt — like more than $10,000 — doing a balance transfer may not be the answer,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
Just shifting your obligation to a different account will not fix underlying financial problems, he says.
“The best reason to try to transfer any credit card balance over to a lower interest rate is so you can save money and get the debt paid off faster.”
— Mikel Van Cleve,
“A lot of folks will play the balance transfer game,” says Van Cleve, in which they keep moving the same debt from new card to new card. The danger, he says, is that eventually creditors and lenders will realize that you’re having trouble managing your finances.
2. Not understanding the introductory rate on the new card.
Some people get excited about a card with a low (or zero) percent interest rate, but fail to realize that it’s just an introductory offer that often applies only to the amount transferred, says Van Cleve.
“New charges you make on the account could be at a higher interest rate,” he says.
Read the fine print and understand how the rates are applied and may change in the future, says Gallegos.
3. Not having a game plan.
“This trips up people more than anything else,” says Gallegos. Promotional periods go by very quickly, and if you do not pay the balance off within that time, the interest rate will increase — often significantly, he says. At that point, you’ll end up losing the benefit of the balance transfer on the remaining balance.
4. Ignoring fees in calculations.
Most balance transfers usually carry a fee, typically around 3 to 5 percent of the balance transferred. For a $10,000 balance transfer, the balance transfer fee might be $300 or $500. “Especially if you’re doing the balance shuffle, incurring a fee each time can add up, piling on to the balance you already had,” says Van Cleve.
Use an online balance transfer calculator to figure out if what you’ll save on interest is more than the fee incurred, as well as how much you’ll need to pay each month to get to zero before the interest rate increases. Also, factor in any annual fee in whether you’ll benefit from a balance transfer card.
5. Spending too much on the new card.
Some people do a balance transfer and then get sucked into trying to earn rewards by spending on the new card, says Gallegos.
“If you are really struggling to make minimum payments or are carrying a very large amount of debt — like more than $10,000 — doing a balance transfer may not be the answer.” — Kevin Gallegos,
Freedom Financial Network
If you’re continuing to charge, you may be defeating the main purpose of the balance transfer — getting everything paid down faster, says Van Cleve.
6. Not considering how the transfer can impact your credit.
Opening a new line of credit will lower your credit score temporarily, Van Cleve says.
A balance transfer also will affect your credit utilization, which also can lower your credit score. “Credit bureaus usually calculate credit utilization — the amount of available credit you use — for each credit card you have,” says Gallegos. “That means if you transfer a balance to a card with a lower credit limit, your ‘available credit’ could decrease.”
Finally, if you close your original card after you move over the balance to the new one, that could shorten your credit history and credit utilization ratio components of your credit score.
7. Jumping at the first offer you get.
Don’t snap up the first balance transfer offer that comes in the mail or that you see online. Do your homework. Check out all the balance transfer cards.
If you’re thinking about a balance transfer, Van Cleve suggests thinking beyond the balance transfer itself to make sure you’re choosing a card that matches your needs and spending style.
Bottom line: Balance transfers can be a great option for reducing your debt as long as you weigh your options, think things through and stay disciplined on paying down that balance.
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