Credit Cards

Too Much Holiday Debt? Don’t Make It Worse

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As a credit card user, your main prerogative is to steer clear of racking up high debt (especially on a high-interest card). However, if you’ve tangled yourself in a messy debt situation, there are options to simplifying what you owe, as well as how much interest you’ll accrue. By opening a low-interest balance transfer credit card, you can get a break on your debt payments.

The most valuable feature of a balance transfer card is that it saves you money by eliminating interest. For instance, let’s say you move $2,000 from your current card, which charges an APR of 15%, to a balance transfer card, which charges an APR of 0% for 12 months. During the life of that debt, you’ll save about $300 in interest by transferring your balance.

However, these sweet terms and conditions don’t last forever, and there is a tradeoff when moving to a new card. Here are the basics to know before going through with changing your card, and transferring your balance.

The Attractive Interest Rate May Be Sneaky

That great interest rate? It’s only temporary, and the regular rate will range anywhere from 11.99% to 20.99%, so take that into consideration. Search for a card with a long introductory rate offer (ideally 21 months or longer) to stave off paying interest until you absolutely have to, as well as check what your permanent rate will be when the offer is over.

You Could Get Hit in Ways You Didn’t Expect

If you make a late payment, your rate will most likely shoot up and change from your introductory APR to the card’s permanent APR, which, in many cases can be as high as 29.99%.

Also, be cognizant of the reality that your attractive APR won’t necessarily apply to new purchases, and may only be applicable for the balance you transferred. It’s often the case that new purchases accrue interest at the permanent, higher APR, from the start. However, some introductory rate offers do cover new purchases as well, but at a fleeting rate (typically just for the first six months).

You’ll Be Charged a Fee

Most cards charge a balance transfer fee between 3% to 4%. In the past, some banks capped their transfer fees at a set dollar amount, but for most cards today, there is no limit. This means the more you transfer, the bigger your fee will be. For instance, if you transfer $10,000, a 3% fee is $300.

If your debt is high, the fee is likely worth paying to escape the interest you would have ordinarily been required to pay. In order to be worth making the transfer, what you’ll be saving in interest needs to be higher than the fee you’ll pay by switching.

You’ll Need Good Credit

Before the recession, interest-free balance transfer cards were easily accessible — however, the best terms today are reserved for those with good or excellent credit. You can still get a balance transfer card, but it may not be as attractive of an offer, pending your credit score.

It’s helpful to know what your credit score is, so you can apply for a card that you’ll be more likely to be approved for. (One way to check your credit score, for free, is by using Credit.com’s Credit Report Card. It updates your credit scores monthly, and also gives you a breakdown of the components of your credit scores so you can see what areas you can improve.)

Some of Your Payments May Be Directed Away From Your Transferred Debt

Though the Credit CARD Act of 2009 requires issuers to apply any money over the minimum payment to the debt with the highest interest (typically your new purchases), issuers are free to direct minimum payments to the debt you carried over.

This means, if your card carries a high interest rate on new purchases, those charges will accrue extra interest because your minimum payments are being allocated strategically to pay off your oldest debts with a 0% APR by the card issuers. You may want to make all new purchases on a separate credit card to avoid the confusion of juggling two different debt balances.

Calculate Whether You’ll Be Saving Enough to Justify the Switch

In the end, making a wise switch to a balance transfer card will require research and a thorough understanding of the new terms and benefits. Make sure you’ll be saving enough by transferring your balance to justify paying the transfer fee and dealing with the fleeting interest reduction.

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