Is It Worth Transferring a Balance?
Most Americans have credit card debt, and for many of us, it just keeps growing. Meanwhile, we keep hearing about amazing offers for balance transfers. The question is, is it really worth doing?
Obviously, the ideal is to simply pay off your credit-card balance each month and avoid interest and other charges. The best approach is to avoid credit-card debt to begin with. Many of us find that difficult to do, and that’s when the annual percentage rate on your credit card starts to make a real difference. If more than 25% of your take home pay goes toward paying down your credit cards, you are already in over your head. You need to take control of your credit cards. That’s when the potential benefit from a balance transfer comes into play.
Should you simply transfer your credit card balances to the one with the lowest APR or look for a balance transfer offer with a lower interest rate? The truth is that transferring balances from one credit card to another can create a false sense of security which leads some people to simply spend more on the old card. You also need to watch out for low introductory percent rates which may balloon to rates higher than your previous card after a certain grace period. But transferring your balance to a card with a lower APR or lower fees can drastically reduce your debt and your monthly payments.
The first step is to call your credit card companies and try to negotiate lower interest rates and no charge for balance transfers. Then you should transfer your balances to the card with the lowest APR and balance transfer fee. Retire the rest of your credit cards, and stop using them for any new charges. Once you know that the balance transfers have gone through and you are certain that there is no balance remaining on those cards, you can cancel the rest of your credit cards except for the one with the next lowest interest rate, to be used for emergency situations.
If you can’t get a good deal on a low interest rate with low or no balance transfer fee with one of your current credit cards, then look into applying for a new card. Choosing a new card may also give you access to more benefits. You may be able to get a card with no annual fee, a longer payment grace period, or even cash back or other rewards.
After you transfer a credit card balance, you need to be certain to make all of your payments in full and on time. There is usually no grace period offered when you repay a balance transfer, so the interest will begin to add up immediately unless you have an introductory 0 percent APR. If you do decide on a zero percent APR card, remember that those rates usually last only for a few months.
It is also important to understand that any payments you make on the card that you transferred your balances to will first be applied to the balance with the lower or promotional interest rate. This means that you must pay off any balance transfers before you begin to pay the balance for any new purchases on that card.
It’s safest to keep your balance transfers on a separate credit card. You should start using a debit card or cash for new purchases to make sure that you are only spending money that you already have in the bank. This will force you to pay for your purchases from your actual budget and prevent you from buying things that you cannot really afford.