10 Balance Transfer Mistakes to Avoid
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It is natural to be tempted to make the most of the balance transfer offers that help tackle your high-interest debt while making significant savings. A balance transfer is a process where you move an existing debt from one credit card to another, typically to take advantage of lower interest rates. This can help you save money on interest payments and pay off your debt faster. However, balance transfer isn’t as easy as it sounds, but if you handle it carefully, you can build credit, become debt-free, and achieve personal finance goals. If you are considering a balance transfer, here are the most common balance transfer credit card mistakes to avoid.
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What is a balance transfer?
A balance transfer allows you to move debt from one credit card to another, usually to take advantage of lower interest rates. This involves selecting a new card with a low or 0% introductory APR, applying for it, and initiating the transfer process where the new card issuer pays off your old card's balance, adding this amount to your new card. The primary benefits are reduced interest costs and simplified payments. Still, it comes with considerations like transfer fees (typically 3-5% of the amount), temporary low APR periods, and potential credit score impacts.
For example, transferring a $5,000 balance from a card with a 20% APR to one with a 0% APR for 12 months and a 3% fee could save significant interest if the balance is paid off within the promotional period.
Better banking is here.
- No account fees
- Earn up to 4.50% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
Common balance transfer mistakes
When considering a balance transfer to handle your outstanding personal loan, credit card debt, or any other outstanding debt, it's important to avoid common mistakes that can negate the benefits and potentially worsen your financial situation. Here are some of the most common balance transfer mistakes.
1. Ignoring the balance transfer fee
Many balance transfer credit cards charge a fee, usually 3-5% of the amount transferred. Not accounting for this fee can reduce the financial benefit of the transfer. For example, transferring a $5,000 balance with a 3% fee will cost you $150. The primary benefit of a balance transfer is saving money on interest. However, if the balance transfer fee is significant, it can offset the savings from lower interest rates. If you don't account for the fee in your calculations, you might incur unexpected costs that can strain your budget.
Account for the balance transfer fee
Before transferring the balance to a new card, calculate the total cost, including the transfer fee. For example, if transferring $5,000 with a 3% fee, the cost is $150. Ensure the savings from lower interest outweigh this fee. Some cards offer no-fee balance transfers. Compare these options to find the most cost-effective choice.
2. Not paying off the balance during the introductory period
Balance transfer cards often offer 0% interest for a limited time, typically 6 to 18 months. Failing to pay off the balance within this period means the remaining balance will be subject to the card's standard interest rate, which can be quite high. One of the most critical aspects of a balance transfer is the introductory period, often featuring a 0% or low interest rate. Failing to pay off your transferred balance during this period can have significant financial consequences.
By not paying interest, all your payments directly reduce the principal balance, which can lead to substantial savings compared to high-interest debt. After the introductory period ends, the interest rate reverts to the card’s standard annual percentage rate, which can be significantly higher. For example, it might jump to 18-25%. This can result in high interest charges on any remaining balance, quickly increasing your debt.
Pay off the balance within the introductory period
Calculate how much you must pay monthly to clear the balance before the introductory period ends. For a $5,000 balance over 12 months, you must pay about $417 monthly. Set up automatic payments to ensure you don't miss any payments and stay on track to pay off the balance.
3. Continuing to accumulate debt
A balance transfer can provide temporary relief but doesn’t address underlying spending habits. Accumulating debt on the old or new card can lead to even greater financial trouble. This can undermine the benefits of the balance transfer and exacerbate financial problems. The primary purpose of a balance transfer is to reduce or eliminate existing high-interest debt.
Continuing to accumulate debt contradicts this goal, making it harder to achieve financial stability. Accumulating new debt adds to your overall financial burden, potentially leading to a situation where you owe more money than before the balance transfer. More debt translates to higher monthly payments, which can strain your budget and make it difficult to manage your finances.
Avoid accumulating new debt
Temporarily stop using your old cards to avoid racking up new debt. Create and stick to a budget to manage your spending and prevent further debt accumulation. Remember, your purpose is to get out of debt, and if you keep spending and taking on more debt, it will ruin the whole purpose of balance transfer.
Better banking is here.
- No account fees
- Earn up to 4.50% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
4. Missing payments
Missing or making late payments on your balance transfer card can result in losing the introductory APR rate and incurring penalty interest rates. It can also negatively impact your credit score. Most balance transfer cards have a clause that voids the intro APR offer if you miss a payment. This means that even one missed payment can trigger the standard, much higher interest rate, significantly increasing the cost of your debt.
Missing a payment usually incurs a late fee ranging from $25 to $40 or more. These fees add to your debt, making it even harder to pay off. Payment history is a major factor in your credit score. A missed payment can be reported to credit bureaus if it is 30 days late, resulting in a drop in your credit score.
Set up reminders
Set up payment reminders or alerts to ensure you never miss a due date. Automate at least the minimum payment to avoid late fees and penalty interest rates. Set up a budget and stick to it until the intro APR offer ends so you can make the most of it.
5. Not understanding the terms and conditions
Each balance transfer card has specific terms and conditions. Failing to read and understand these can lead to unexpected fees or loss of the introductory rate. Key terms to review include the length of the introductory period, the standard interest rate after the promotional period, and any penalties for late payments. Failing to do so can lead to unexpected costs and negate the potential benefits.
Many balance transfer cards charge a fee, typically 3-5% of the transferred amount. Ignoring this fee can reduce or eliminate the savings from the lower interest rate. The 0% or low interest rate usually applies for a limited period, often between 6 and 18 months. Not knowing when this period ends can result in unexpected interest charges if you haven't paid off the balance by then.
There could also be an annual fee on your credit card you must be aware of. Certain conditions must be met to retain the introductory APR, such as making on-time payments. Violating these conditions can lead to losing the promotional rate. After the introductory period, the interest rate typically reverts to a much higher standard rate. Not knowing this rate can lead to significant interest charges on any remaining balance.
Understand the terms and conditions
Carefully review the credit card issuer’s terms and conditions, including the length of the introductory period, the regular interest rate, and any penalties for late payments. Contact the card issuer to clarify the terms before proceeding if anything is unclear.
6. Transferring a balance to a card with a high standard interest rate
The card's regular interest rate will apply if you can’t pay off the balance within the introductory period. Ensure that the regular rate is not prohibitively high compared to your current card. Transferring a balance to a card with a high standard interest rate can be risky if not managed properly.
If the introductory 0% or low APR period is short (e.g., 6 months), you have less time to pay off the transferred balance before the high standard rate kicks in. Once the introductory period ends, any remaining balance will be subject to the card’s high standard APR, which can be significantly higher than the rate on your previous card.
Choose a card with a reasonable standard interest rate
Look for cards with a low standard interest rate if you can’t pay off the balance within the introductory period. Have a plan to manage the debt if you still have a balance when the standard rate kicks in.
7. Ignoring credit limit constraints
Your new card's credit limit might not be high enough to accommodate your entire balance. This could leave you with debt on multiple cards, complicating your debt management. When performing a balance transfer, ignoring credit limit constraints can lead to several complications that may negate the benefits of the transfer. Understanding and managing your credit limit effectively is crucial.
If the credit limit on the new card is lower than the amount you wish to transfer, you can only transfer a portion of your debt. This means you will still have balances on your original cards, complicating your debt management efforts. Utilizing a large percentage of your credit limit on the new card can negatively impact your credit score. A high credit utilization ratio (the amount of credit used compared to the total credit available) is a significant factor in credit scoring models. Ideally, you want to keep this ratio below 30%.
Consider credit limits
Ensure the new card’s credit limit can accommodate your balance transfer. If the limit is lower than your current debt, decide how you will manage the remaining balance. Leave some available credit to maintain a good credit utilization ratio.
8. Damaging your credit score
Applying for a new credit card results in a hard inquiry on your credit report, which can slightly lower your credit score. Additionally, closing the old account after the transfer can affect your credit utilization ratio and the length of your credit history. Transferring a balance can negatively affect your credit score if not handled carefully.
When you apply for a new credit card for the balance transfer, the card issuer will perform a hard inquiry on your credit report. Each hard inquiry can lower your credit score by a few points, and multiple inquiries can have a more significant impact in a short period. Transferring a large balance to a new card can result in a high credit utilization ratio. High utilization can lower your credit score.
Protect your credit score
Avoid applying for multiple credit cards simultaneously to minimize hard inquiries on your credit report. Unless there’s a compelling reason to close them, keep old accounts open to maintain your credit history length and utilization ratio.
9. Using the new card for purchases
Purchases on the new card may not benefit from the 0% introductory rate. The interest on new purchases could start accruing immediately, leading to additional debt. Using the new balance transfer card for purchases can undermine the balance transfer benefits and lead to several financial pitfalls.
Balance transfer cards often have different APRs for balance transfers and new purchases. While the balance transfer might have a 0% or low introductory APR, new purchases may immediately be subject to a higher, standard APR. This can result in accruing interest on new purchases while you’re still paying off the transferred balance at a low rate.
Making new purchases on a balance transfer card increases your overall debt, making it harder to pay off the transferred balance within the introductory period.
Avoid using the new card for purchases
Use the new card exclusively for the transferred balance, not for new purchases. If you must make new purchases, use a different card that doesn’t carry the transferred balance. Alternatively, use cash for the new purchases.
Better banking is here.
- No account fees
- Earn up to 4.50% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
10. Choosing the wrong card
Not all balance transfer cards are created equal. Choosing a card without a sufficiently long introductory period or with high fees can negate the benefits of the transfer. Selecting the wrong balance transfer card can undermine your efforts to manage debt effectively. It’s crucial to carefully evaluate your options and choose the card that best fits your financial situation.
Some balance transfer cards offer a 0% or low introductory APR for a shorter period (e.g., 6 months). If the introductory period is too short, you may not have enough time to pay off the transferred balance before the standard interest rate kicks in, leading to higher interest charges. If your debt repayment plan extends beyond the introductory period, a card with a longer 0% APR period would be more suitable. Many cards charge a balance transfer fee, typically between 3% to 5% of the amount transferred. Choosing a card with high fees can offset the savings from the lower interest rate, making the balance transfer less cost-effective.
Select the right card
Use comparison tools to find cards that offer the best balance transfer deals, considering fees, introductory periods, and interest rates. Look for user reviews and expert opinions to choose a reliable card issuer with good customer service.
FAQs
Can I transfer a balance between cards from the same issuer?
Generally, you cannot transfer a balance between two cards from the same issuer. You'll need to choose a card from a different issuer.
How does a balance transfer affect my credit score?
Applying for a new card results in a hard inquiry, which can temporarily lower your credit score. However, reducing your debt and managing it responsibly can improve your score over time. Avoid closing old accounts immediately, as this can affect your credit utilization ratio and credit history length.
Can I use the new card for purchases?
While you can, it's usually not recommended because purchases might not benefit from the 0% introductory rate. Interest on new purchases can start accruing immediately.
How much can I transfer?
The amount you can transfer is typically limited by the credit limit on the new card. Ensure the new card's limit is high enough to cover your balance.
What if I miss a payment?
Missing a payment can result in losing the introductory rate and incurring penalty fees and higher interest rates. It's crucial to make at least the minimum payment on time every month.
The bottom line
If used wisely, a balance transfer can be an effective way to manage and reduce debt. Carefully consider the fees, terms, and your ability to pay off the balance within the promotional period. Assess your spending habits to ensure you don't fall into the trap of accumulating new debt. By understanding the benefits and risks, you can make an informed decision aligning with your financial goals.
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