Balance transfer offers are slowly making a comeback, and although they haven’t yet reached their pre-recession glory days, they are attractive enough to warrant a closer look.
But before you sign up to transfer your balance to a new card, make sure you thoroughly read the terms and conditions and compare offers so that you know you are getting the best deal. Not only has it has it become harder to qualify for the best terms, say experts, there are also more hidden surprises for those who ignore the fine print.
“People must do their homework before applying for a balance transfer,” said Gail Cunningham, Vice President of Public Relations at the National Foundation for Credit Counseling in an email. “The offers with the best terms are usually reserved for those with good credit, so the first step is to make sure you qualify.”
To get the best balance transfer offer possible, follow these five steps before filling out an application.
1. Consider your credit score.
If you don’t already know your credit score, pull a copy of your credit report online and pay to get your score immediately. Knowing your credit score will help you determine whether you will qualify for a new balance transfer card and which credit limit to expect.
“Those with better FICO scores can anticipate getting higher credit lines, when applying for new credit cards,” says Robert Hammer, chairmain and CEO of RK Hammer Investment Bankers in Thousand Oaks, CA. “Perhaps not as high as the credit limits of the last decade, but nevertheless still far higher than the average.”
In addition, knowing your credit score will help you gauge the impact of the balance transfer on your score. Applying for a 0 percent APR credit card could affect it in two ways. First, each time you apply for credit, it gets recorded as a credit inquiry on credit reports, and too many credit inquiries will lower your score. Second, carrying high credit card balances in relation to overall credit can also damage your score. If you are at the borderline between good and excellent credit, a balance transfer could be enough to tip the balance.
Tip: If you’re planning to take out a major loan, such as a mortgage or a home refinance in the near future, that 0 percent APR deal could end up costing you a bundle if your credit score is impacted. Unless you have superior credit, this might not be the time to apply for a new credit card or make a balance transfer.
2. Determine how quickly you can pay back the balance transfer.
Before you start comparing balance transfer offers, it helps to know how quickly you will be able to pay off the loan. Balance transfer cards typically convert to high interest rates once the promotional period expires. (That’s how card issuers make their money.) As a result, a 0 percent APR offer that lasts for 12 months could end up costing more than a 2.99 APR offer that lasts for 18 months if it takes you more than a year to pay off the transfer amount.
To determine how long it will take you to pay off the balance transfer, divide the amount you plan to transfer by the monthly payments you are able to make. If necessary, make a budget of income and expenses, and based on that, determine how much you will pay off each month.
Tip: Treat the balance transfer as a loan. A 0 percent balance transfer offer sounds like free money, but don’t fool yourself. If you can’t pay off the balance transfer before the promotional period expires, you are really taking out a high-interest loan.
3. Compile a list of the best balance transfer offers.
Armed with the information above, it’s time to make a list of the balance transfer offers available to you. For an easy overview, use a credit card comparison guide that lists all the offers on one page.
If you have less than excellent credit, look at the cards available for people with good credit. (And if you have fair credit, know that you’ll have a harder time finding a 0 percent balance transfer offer that you qualify for).
Select the three to six best balance transfer offers that you find and write them down.
Tip: Go for diversity. Include different card issuers on your list, and also write down one or two offers that feature a higher promotional APR, but come with longer promotional periods.
4. Compare terms.
The devil is in the details. Comparing terms is essential, but this is a step many people skip.
“The savings from the low APR can be wiped out by excessive fees, so working the numbers in advance is critical,” noted Cunningham. “Before signing on the dotted line, make sure that you fully understand the fees associated with the transfer, and have put a pencil to them to determine if the transfer is truly beneficial to you.”
For each balance transfer offer selected in step three, make a note of the balance transfer fee in addition to the promotional rate and the length of the promotional period and whether there is a promotional rate on purchases as well. Also write down any special terms that could impact your decision.
Tip: Watch out for teaser terms (usually denoted by an asterisk) that reserve the advertised terms to only those with the very best credit. Read the footnotes carefully to avoid surprises.
5. Calculate the cost of the balance transfer.
Now it’s time to calculate the cost of each balance transfer offer over the life of the loan. Using your target balance transfer amount and the estimated time you’ll keep the loan, calculate for each card offer:
- The total balance transfer fee.
- The cumulative interest charges until the balance transfer is paid off (if you will be keeping the loan past the promotional period).
This may seem like a cumbersome exercise, but it can save you a bundle. Once you include the balance transfer fee, that ‘free’ 0 percent APR credit card offer may not seem like such a good deal after all. And if you plan to carry the loan for a long time, you may find that a low-interest balance transfer offer is the better way to go than a 0 percent APR offer.
Tip: Don’t make new charges to the card until the balance transfer is paid off. Otherwise, that short-term loan could easily turn into long-term high-interest credit card debt.