Achieving proper credit balance
Offers from credit card companies to temporarily skirt interest charges can be enticing.
Reducing interest payments by transferring a balance from one card to another is a quick way to lower monthly finance charges. But taking advantage of such a promotion, even one offering a zero interest rate on balance transfers, doesn't always pay off. That's especially true for cardholders who have a tendency to carry a balance.
That's because once the low-rate period ends, interest on any unpaid charges starts adding up again.
“Some of the rates at the end of the promotional period can be quite punishing,” said Christina Tetreault, staff attorney at Consumers Union, the advocacy arm of Consumer Reports.
“Consumers who are considering a balance transfer should really take a hard look at the offer, do the math and figure out if they can commit to a payment plan,” she added.
Here are some tips on gauging whether a credit card balance transfer offer makes financial sense:
1. Watch out for fees
Card issuers typically will charge a fee of about 3 percent on the amount transferred, but it can go even as high as 5 percent.
Let's say the fee is 3 percent. On a balance transfer of $10,000, you'll be charged $300 up front, usually rolled into your balance.
Some cards don't charge a fee on balance transfers. The Chase Slate card, for example, doesn't charge a fee to new cardholders, so long as they transfer the balance from another card within 60 days after being approved, said Bill Hardekopf, CEO of LowCards.com, which track credit card offers.
2. Remember, rates are temporary
Generally, card balance transfer offers include an introductory period to pay off the balance at zero or a sharply reduced interest. The period can last for a year or more. For instance, Discover IT provides as long as 18 months.
If you don't pay off the card before the promotional rate period elapses, you will be charged a higher interest rate on your balance and any transfer fees.
With Chase's Slate card, for example, after 15 months cardholders would move from zero percent interest to a variable rate ranging from 12.99 percent to 22.99 percent. With Discover IT, the interest rate on balance transfers jumps after 18 months from zero to a variable rate ranging from 10.99 percent to 22.99 percent.
In addition, the rules on balance transfers usually require cardholders to make all payments on time. Miss even one, and you may forfeit the low interest rate.
“Promotional rates can expire and one misstep can wipe out any of the benefits that a consumer might see to transferring a balance,” said Tetreault.
3. Consider balance limits
Card issuers may approve you for a balance transfer offer, but the amount you will be approved to transfer can vary. And you typically won't know how much credit the lender will extend to you until after you've been approved.
That means you may be able to unload only a portion of your card debt onto a new one with a more favorable interest rate. Consider that when you apply for the card.
4. Do the math
You've taken into consideration that there may be fees and a limited amount of time to pay down your debt before the interest rate jumps. But is opting for a balance transfer card ultimately worth it?
Look at the card jammed with charges that you're considering refinancing through a balance transfer. Estimate how long it will take you to pay the balance and how much in interest charges, given the card's annual percentage rate, or APR, you will rack up over the same period.
Then do the same calculation, based on the terms of a card balance transfer offer, specifically: The promotional interest rate and number of months that it's in effect. Assuming the entire balance can be transferred, that should tell you how much you stand to save.
You can do this calculation on an online card payment calculator like this one from Bankrate: http://apne.ws/1gSm3z5
5. Consider other options
Borrowers who are overwhelmed by debt may not qualify for a balance transfer card, as such offers are typically extended to borrowers who have a FICO score above 700.
And adding another credit card to one's wallet may not be the best option if there are several others already carrying high balances.
Consider asking the credit card company to lower your interest rate, suggests Tetreault.
That may not work, but it doesn't hurt to ask.
Another option: Seek credit counseling, which can provide assistance managing debt, making a personal budget and dealing with card issuers. Here's how to find a qualified credit counselor: http://apne.ws/1jSz7HC .
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