Balance Transfers Can Help – And Hurt – Your Credit
Las Vegas isn’t the only place where cards are shuffled. For many who carry credit cards, balance transfers are a good way to shift the burdens of a high-interest card to one that has a lower interest rate.
The move can save money and can make life easier for those tired of juggling multiple payments. There are even amazing incentives offered by the card companies, including a no-interest rate grace period balances for long stretches and hefty cash-back rewards after transferring your balance. You may even be able to consolidate non-credit card installment payments for your car, appliances and other goods.
But there are some very real downsides to playing the transfer game (just like Las Vegas) and you need to be aware of the potential for digging yourself into a huge financial hole and/or hurting your credit status rather than helping it.
First, keep in mind that transferring doesn’t clear your debt. You’re merely trying to save long-term interest on high balances. By shifting your balance to a lower-interest card, you can save by paying off all that you previously owed. The transfer is not a license to keep running up the balance, a practice which will make the switch savings insignificant and may increase your financial burden in certain cases.
Second, there are often hidden fees involved with the acquiring card that may not be apparent at first glance. That can really bite into any savings achieved by the transfer and should be calculated into the overall benefit of switching cards (there are online balance transfer calculators to help with your decision).
SCARY BALANCE TRANSFER FEES
One big monster often lurking in the fine print of your new card agreement is known as the balance transfer fee, which is typically a percentage of the amount you transfer. In most cases, there is no cap on the amount of this fee, although most fall in the three percent range. If you are transferring a large balance, that fee may wipe out any interest savings, as three percent of each $10,000 comes to $300. That’s in addition to any penalties, interest, annual fees and other deaths of a thousand financial pecks.
Finally, there may come a time when the honeymoon is over on your new card, and that low interest rate (called a teaser, for obvious reasons) will balloon into something less satisfactory. This can happen automatically after a grace period, or may occur right away if you are late on a payment. Some cards also offer a low rate only on the transferred balance. Anything purchased on the new card gets a higher rate.
Calculating the benefits can be tricky if you are dealing with a lower rate only on the balance transferred. There are no laws preventing the card issuer from using your monthly payment on the lower interest debt before attacking the higher interest charges.
The Congressional Credit Card Act of 2009 mandates that any amount paid above the minimum be applied to the highest interest rate first. But your monthly minimum payment can be applied to the lower interest first, with any overages on that amount going to the higher interest balance. That potentially draws out the repayment schedule and allows the bank to reap the interest rewards on your higher interest charges for a longer period.
FREQUENT FLYING ISN’T WITHOUT RISK
You may have thought of the perfect solution to the dilemma of grace periods and other card company tactics – that is, keep switching your balance to other cards offering incentives. That can work, and you may be able to take advantage if you’re great at calculating your benefits for doing transfers.
However, keep in mind that credit bureaus track this activity, and the shuffling game may result in dings to your overall credit rating. That’s because opening a new account indicates you may soon take on new debt, which increases the risk in lending. The good news is the drop is minimal and a good track record will quickly bring it back up.
There is also one way that moving to a new card can help your rating. If the new card has a higher credit limit, your limit-to-balance ratio can improve, since you are not using all of your available line. That will increase your score over time.
As with any credit issue, whether a balance transfer works for you is mainly a matter of financial discipline and attention to details. If you’re careful and read the fine print of your card agreements, you can take advantage of the lower interest rates on a new card and significantly reduce or even eliminate your debt. That’s the Vegas-style jackpot you’re aiming to achieve.
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