Balance transfers are one of the most enticing offers that a credit card company will send you. 0% interest rates are common, and for many of us the offer can be too attractive to turn down. How then to make best use of balance transfers? Are there risks to your credit score? In this article we’ll break down the drawbacks and highlight the benefits to balance transfers for you.
First, in case you haven’t received snail-mail spam balance transfer offers, a balance transfer is essentially what it sounds like. For a percentage fee, your credit card will let you move another card’s balance onto it. So if you have $2,000 on your Visa, then you might get an offer from Discover that lets you transfer that balance to your Discover instead, clearing out your Visa balance.
Now, what’s in it for you? First of all, you will often get an extended period of low or no interest rate after you transfer. This would mean a substantial reduction in the interest you pay. This is a huge benefit if you’re not able to pay the balance off immediately. For instance, on your $2,000 debt, if you can transfer it to a card with a 12-month 0% rate from an 18% card, then you could save almost $400 over the year. Not too bad!
However, there’s a catch. The card you transfer it to will often charge you a fee. Standard fees are often between 3%-5%, meaning that the $2,000 balance would leave you short $60-$100. You’re still likely to save, although the savings might not be as large as you would like.
Unfortunately, that isn’t the only potential issue. If you are considering making a large purchase that you’ll need to borrow for–a house certainly, or even a new car–then you will want to make sure to consider possible effects on your credit score. The effect will be minor compared to skipping mortgage or having your account turned over to collection agencies. However, every point counts when making a big purchase: if you take out $250,000 for a mortgage, just 1% higher on your interest rate could cost you over $100 more per month, making for over $36,000 more on a 30-year loan.
If you aren’t in the market for a home, a car, or any other large loans, and you have a large balance with a high rate, a balance transfer could be the way to go. There are a couple things to watch for if you want to make sure you get the most out of the balance transfer.
First, try to get the lowest transfer fee you can. A good maximum fee rate to aim for is 3%. If you can’t find a 3% rate, it might still be worth going up to 5%, but there are 3% cards out there so hunt them down if you can!
Second, the very best options are usually available on new credit card accounts. And so, if you have a high balance to transfer–or if you’re worried about carrying a balance too close to your credit limit–then applying for a new card with a low or even no-fee transfer could be an excellent idea for you. Seeking out a card with a 0% interest rate for at least twelve months is a great goal, especially if the transfer fee is small.
All in all, balance transfers are one of the most useful aspects of credit cards. While you won’t earn many points on them, the interest that you could save makes them well worth it for many people. Check out your options today!
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