Balance transfers are great solutions for paying down multiple credit cards. They often come with 0% introductory interest rates that give you a window of about a year to pay off what you can before the interest kicks in, but they do come with a few catches.
Balance Transfer Fees
As with any credit card, balance transfers come with fees. Unlike other cards, there are fees unique to balance transfer credit cards.
Credit card companies send out promotional mail advertising their balance transfer services because they make money off of the transferred balance. Oftentimes this can be as much as 3 – 4% of the balance being transferred and who ends up paying that money? You guessed it, you do.
A transfer fee of 3 or 4% may not add up to much on lower balances, but if you transfer $5,000 to the new card you can expect to pay as much as $200 in transfer fees alone.
This upfront fee is often added to the balance of your credit card, which is then considered in your first month’s payment. What happens if you can’t afford to pay that fee upfront? You end up losing any promotional rates that most likely urged you to open the account in the first place.
All fees considered and promotional rates aside, you could end up with a bigger monthly payment than you had before. Not only that, but the transfer fee could easily be more than the amount of interest you end up saving, which negates the purpose of transferring your balance.
Missing a payment or even being a day late will also lead to finance charges. These charges can increase your interest rate anywhere from 24 – 35%, which is usually the ballpark default rate for balance transfers.
What’s more, those 0% introductory rates often only extend to the transferred balance. Any new purchases may be subjected to interest. This may not matter if you are using the balance transfer to pay down debt, but it makes a difference if you plan to continue using the card for frequent purchases.
So How Can You Save Money?
Balance transfers are great if you can make the minimum monthly payments on time. Miss a single payment and you could end up with excessive fees and lost promotions. As long as you stay in the habit of making that payment on time, you can take advantage of everything the introductory rates have to offer.
Ask yourself if the balance transfer fee is worth the price to get out of your current interest rates. With multiple credit cards, that is often the case
Compare credit cards carefully to see which ones offer transfers without fees. Having a good credit rating helps put you in a better position to negotiate with credit companies on their best deals.