Balance transfer credit cards can feel like a godsend to the indebted. Creditors dangle a credit card in front of you that promises to slash or eliminate your interest rates for 12-18 months, sometimes even as much as 30!
– sometimes over 30! – but it goes without saying that there are strings attached.
The banks know 40% of consumers will carry their debt past the introductory period, which means they eventually will be paying interest on their balance. That is the only reason card companies offer to refinance credit card debt in the first place.
For consumers, the whole point of getting one of these cards is to escape the debt cycle. If you fail to pay off the debt during the introductory period, those old rates you were so eager to purge yourself of, will catch up with you. You’ll be looking at variable APR’s ranging between 14%-26%. In other words, you’ll be right back where you started.
All of this isn’t to say that balance transfers are a bad way to consolidate debt. Just don’t look at them as a get-out-of-debt-free-card.
If, however, you play your cards right, you can save a lot of money. The key is knowing what pitfalls to sidestep.
Here are seven mistakes to avoid with a balance transfer credit card.
Mistake 1: Using the Balance Transfer Card for New Purchases
First, be aware that not all balance transfers come with 0% interest on new purchases. Also, some cards that do offer 0% on purchases, have a different introductory period than for balance transfers. Check the fine print closely.
You may be tempted to start swiping your shiny, new card at various department stores, especially if it does come with an introductory 0% APR on purchases.. That is why so many consumers who use these cards fail to repay their balances by the end of their grace periods. They want to take advantage of a no (or low) interest loan. That’s reasonable. What’s not reasonable is stacking purchases on top of a loan you have a limited time to pay off. Every purchase made on your balance transfer credit card is a step in the wrong direction.
Mistake 2: Failing to Clear the Balance by the End of the Promotional Period
Promotional periods vary between six and 36 months, and then it’s welcome back high interest credit card payments!
The average rate for balance transfers is 19.33% after the introductory. That’s the “average rate” meaning yours could be higher, maybe much higher.
If you committed mistake #1, you may have dug yourself deeper in the hole than you were when you began this whole balance transfer experiment.
Before even applying for a balance transfer credit card, calculate the monthly payments you will have to make to clear the debt before your grace period ends.
For instance, if you have $6,000 in credit card debt, it’ll cost you $334 (rounded up to the nearest dollar) a month to clear the balance in 18 months. You can trim it down to 12 months with payments of $500 a month. It would cost you $1,000 a month to rid yourself of debt within six months.
And that’s if you don’t use the card at any time for new purchases.
Allocating $1,000 a month solely to credit card debt would be hard, unless you’ve found somewhere to hole up rent free for a while. An ideal balance transfer card gives you a long enough, low-interest grace period to repay the debt in full.
Mistake 3: Missing the Transfer Deadline
You can’t just “wait until you feel like it” to transfer your debt to a balance transfer card. Most cards require you to transfer your balance within three months. If you fail to transfer the balance within that window, they’ll cancel the deal. This means no shot at a 0% APR. All you’ll wind up with is another high interest credit card in your wallet.
Mistake 4: Forgetting About the Last Payment on Old Cards
Balance transfers can take a few days and sometimes a few weeks to complete. In the meantime, the pending balances on your old cards will be creeping up to their due dates. If you ignore your old cards, you risk getting slapped with late fees.
If this happens, your new balance (late fees included) may exceed your balance transfer credit card limit. This means you’ll have to slim the debt down before attempting another transfer, and you’ll be in even greater risk of committing mistake #3: missing the transfer deadline.
Even if you manage to transfer the debt without exceeding your limit, missing payments will cost you money and is one of the surest ways to send your credit score in a downward spiral.
Mistake 5: Not Realizing There Is Still a Minimum Payment
You can skip this part if you’ve already budgeted the amount needed to repay your debt in full by the end of the promotional period. You don’t need to worry about the minimum payment, since your payments will far exceed it.
If, however, your plan was to kick back and bask in the benefits of interest free debt for a few months, you’re in for a rude awakening.
Balance transfer credit cards have minimum payments of 1%-2% of the balance. Most cards will pull the promotional deal off the table after the first missed payment. Remember, the average interest rate after a balance transfer’s grace period ends, is 19.33%. This isn’t astronomical, but it’s a long way from zero.
Don’t go a month without making the minimum payment. Also, don’t fall into the rut of scraping by with just the minimum payment. Pay as much as you can.
Mistake 6: Overpaying on Transfer Fees
Not all balance transfer cards are created equal; some come with 0% transfer fees. This could save you hundreds of dollars, depending on the amount you need to transfer.
For instance, transferring $10,000 at a 4% balance transfer fee would make your new total $10,400. That is money you could be spending on clearing the debt.
A 3%-5% fee is probably still worth it to free yourself of an interest crippling credit card, but don’t be too quick to pull the trigger on the first offer creditors dangle in front of you.
Just like there’s a window to complete balance transfers before the promotion expires, there’s a window to beat to keep most 0% transfer fee deals. Creditors don’t like to wait around for you to make moves, hence all the incentives for you to get moving. The typical window is about 30 days, so mark all the calendars in your home, office, and smart phone, just in case.
Mistake 7: Closing Old Credit Card Accounts
You might be tempted to rip your old credit cards out of your wallet, snip them in half with a clean pair of scissors and toss them in the recycling bin. Don’t do it!
As therapeutic or symbolic as this might be, it’s not a wise or frugal financial practice.
Credit history makes up 15% of your credit score. This means the longer you’ve had a credit card (or any open account for that matter), the more it’ll improve your credit score.
So, don’t close those old accounts … just don’t use the cards anymore.
Balance transfer credit cards can be a great way to alleviate high interest debt, but one mistake could mean losing the deal and missing out on all the savings.
A balance transfer doesn’t make the debt go away. In fact, it propels it to the forefront of your priorities. If you want to get the most out of a balance transfer credit card, have a plan that will clear the debt before the promotional offer ends. If your offer lasts six months, it’s in your best interest to repay the debt in six months, before the return of crippling interest.
This is where credit counseling from InCharge Debt Solutions can help. Whether you’re faced with six months or 36 months, a nonprofit credit counselor like InCharge can go over a budget with you, helping you allocate the funds needed to repay the debt in time.
And the credit counseling service is free! Use it.