How a balance transfer can put money in your wallet
By Dawn Papandrea
October 16, 2015
Carrying a revolving balance on a credit card with high interest can suck the financial life out of you. Those interest charges prevent you from making a significant dent in your debt load.
One solution is to consider those balance transfer offers that keep coming in the mail.
“If you’re carrying a balance that is accumulating interest, a balance transfer to a new card that offers a lower rate can be a good option for consumers,” says John Rosenfeld, ?head of Everyday Banking at Citizens Bank. Ideally, by booting your balance over to a new, lower interest card, you can work toward paying it off without that pesky interest getting in the way.
Here are some questions to ask yourself before you attempt the big move:
What’s in it for me?
“The main benefit of doing a balance transfer is trying to find a lower interest rate and saving some money,” says Lori Dietrich, director for consumer information services at Experian, one of the three major credit bureaus. Balance transfers also can help to consolidate consumers’ overall debt to simplify their bills, which can be especially helpful for those carrying multiple cards with different interest rates, she says.
Will I get approved?
Just because you get those offer letters in the mail doesn’t mean you can magically transfer all your balances to a new account. “Lenders are going to be looking at the creditworthiness of the consumer to see if they can provide a line high enough to take on that debt and the potential risk it may pose,” says Dietrich.
If you’re carrying a balance that is accumulating interest, a balance transfer to a new card that offers a lower rate can be a good option for consumers.”
— John Rosenfeld,
?head of Everyday Banking
at Citizens Bank
As with any credit application, the issuer will look at your payment patterns and your overall credit history. Even if you are approved, your credit limit might not be high enough to move over as much high-interest debt as you’d like. If that’s the case, you need to determine if moving over a portion of your balance is worth the trouble — and the fee as most balance transfer cards add a 3 to 5 percent fee to the amount that’s transferred.
Keeping tabs on your own credit can give you a clue where you stand before you submit your balance transfer card application. You can get your free credit reports from Experian, Equifax and TransUnion via AnnualCreditReport.com once per year, and from there, request your credit scores.
“Make that request each year to see what your credit looks like,” says Dietrich. “If you’re considering a balance transfer, it’s a good time to make that assessment.”
Which balance transfer card is right for me?
Once you decide that you want to move forward and that you’ll likely be approved for a balance transfer, how do you know which card is best? The easy answer: “Check for promotions that allow you to transfer credit card balances with low fees, and that offer 0 percent interest for at least the first year,” says Rosenfeld.
You should also think ahead and consider if the new credit product meets your needs.
“Think about how you use credit and your longer-term goals,” says Dietrich. Are you just looking to pay off your balances and be free of any debt obligations? Or are you also interested in a new card that offers benefits and rewards, assuming you’ll be able to pay your bill in full each month?
The main benefit of doing a balance transfer is trying to find a lower interest rate and saving some money.”
— Lori Dietrich,
director for consumer information services at Experian
In evaluating balance transfer offers, it’s important to read the fine print. For instance, what will be the interest rate after the introductory period expires? What is the interest rate on new purchases? Finally, what is the balance transfer fee? Although the prospect of 0 interest is attractive, don’t forget to add the 3 to 5 percent fee onto the balance you bring over, says Dietrich.
To help you crunch the numbers, try using an online balance transfer calculator to figure out a payoff plan, and to compare the fee to the interest you’ll be saving.
How will a balance transfer affect my credit score?
Anytime you apply for a new account, an inquiry is posted to your credit file, says Dietrich. However, assuming you’ll be paying down the debt over time, your credit utilization should be decreasing, she says. In other words, the short-term dip in your score for opening the new line of credit should come back up quickly if you stay current on your payments and reduce your balance.
Again, you do need to make a balance transfer decision in the context of other financial goals you may have. For instance, if you plan to shop for or refinance a mortgage or seek a car loan in the immediate future, it’s not the best time to start adding new credit lines, says Dietrich. That’s because even a small drop in score can prevent you from qualifying for the best credit terms.
Once the balance is moved to a new card, your work is not finished. “You also need to come up with a plan to pay that debt down,” Rosenfeld says. “Too often, consumers transfer balances and then only pay the minimum.”