Are Balance Transfers Worth It?
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Many consumers are flooded with direct mail offers from credit card companies, where issuers dangle 0% interest rates for a substantial number of months if consumers simply transfer the balance from their existing card.
These “balance transfer” offers are extremely tempting. But are they worth it?
They can be a very good way to cut down on a significant amount of interest penalties. On the other hand, they may be a costly way of simply moving your debt from one card to the other if you don’t pay off the existing debt in a timely manner.
Calculate Your Savings
When making your decision on whether to do a balance transfer, you first need to do a mathematical calculation. Take a look at the length of the 0% introductory offer on the potential new credit card. For the sake of discussion, let’s say it is 15 months. You need to calculate how much interest you will pay on your existing credit card debt with your current issuer during the next 15 months. You could save that amount of money if you transferred the balance from your current issuer to this new card with that introductory offer.
However, you must deduct the balance transfer fee that the new card may assess. Most cards charge a balance transfer fee of 3% on the amount you transfer. The exact amount is found in the card’s terms and conditions. So if you were transferring $5,000, a balance transfer fee of 3% would cost you $150. (Note: a great tip is to transfer the balance to the Chase Slate card. This is one of the only major credit cards which charges no balance transfer fee if you make the transfer within the first 60 days of being a cardholder, and it has an extremely attractive 0% introductory period of 15 months.)
Subtract the amount of the balance transfer fee from the potential savings resulting from the interest charges and you have the net amount you will save by transferring the balance.
Other Factors to Consider
Here are some other factors to keep in mind:
* Make sure you analyze the ongoing APR of the new card you are considering. Determine how this interest rate compares to your current card. If it is too much higher, it may not be worth the risk. You need to take an honest assessment on how long it will take you to pay off your credit card debt.
* Once you transfer the balance, try to pay off your full balance during that introductory period. Have this marked on your calendar and do everything you can to pay off the entire balance by this date. Then you will not be subjected to the ongoing interest rate on the new card.
* You MUST make sure to make your payments every month on time. If you are late for any payment on your new card, you will most likely forfeit your 0% introductory rate and will immediately begin paying the ongoing APR. This defeats the reason you transferred the balance in the first place.
* In addition, always pay at least the minimum monthly payment. Do not pay less at any time or this could lead to the loss of your 0% introductory APR.
* Keep your credit score as high as possible at all times, especially during this introductory period. You don’t want to give the issuer any reason to increase your ongoing APR due to a costly mistake that lowers your credit score.
* You may be tempting yourself to incur more debt. After all, you will now have two credit cards, including your existing card which might not have any balance on it. If you are not financially disciplined, you may be tempted to rack up more debt.
* Speaking of temptations, some balance transfer cards offer 0% APR on new purchases for a period of time. This is the issuer’s way of luring you to make more transactions on that card. They are betting that you won’t pay off all your debt during the introductory period. A good rule of thumb: don’t make any purchases on a card that you use for a balance transfer until you have the entire balance paid off.
* Most balance transfers require the cardholder to have a good or excellent credit score. If you do not have an excellent credit score, your ongoing APR may be higher than the advertised rate.
* Your new card’s credit limit may not cover all of your existing debt on your current card. In that case, you have to decide whether it is worth the potential fees to transfer just a portion of the debt to the new card.
* Along those same lines, the new issuer may not allow you to transfer all of your existing debt, but rather just a portion of it. Check the new card’s fine print to see if there is a cap on the amount you can transfer.
Here are some of the best balance transfer cards on the market today:
The Chase Slate card is the most attractive balance transfer card in the credit card industry. It offers 0% APR for 15 months on both purchases and balance transfers, and then has an ongoing interest rate between 12.99% and 22.99%. But what makes this card so attractive is that there is no balance transfer fee if you make the transfer during the first 60 days of being a cardholder. After that, the fee for future balance transfers is 3% of the amount transferred. Cardholders also receive their FICO score for free each month. There is no annual fee on the Chase Slate card.
The Citi Simplicity card has one of the best introductory offers in terms of APR. The card has a 0% introductory APR for 21 months on both purchases and balance transfers. Then, an ongoing variable APR between 12.99% and 22.99%. There is a 3% balance transfer fee. This card is rather unique in the industry in that it has no annual fee, no late fee and no penalty rate.
The Citi Diamond Preferred card also offers a 0% introductory APR for 21 months on both purchases and balance transfers. The ongoing variable APR is between 11.99% and 21.99% depending on your credit worthiness. There is a 3% balance transfer fee but no annual fee.