At one time or another, every credit card holder has likely received an offer to move an existing balance to a new card with a larger limit. This is usually coupled with an extremely attractive introductory interest rate.
It looks easy to do, and – in truth – it usually is. It can also be a good deal if certain parameters are met. However, doing this can be also very costly if they aren’t. Here are some credit card balance transfer pitfalls of which you need to be aware.
The Upsides
You’ll usually get a lower interest rate—for a while. You’ll also get a card with better terms—if you choose carefully. And, you can consolidate your debts, which can give you a lower monthly payment.
But while the upsides exist, they might not overshadow the possible downsides. And to be a responsible consumer, you need to know the pros and the cons.
The Downsides
- That attractive interest rate is fleeting.It is also predicated upon you making all of your payments on time. If you’re late once, or miss even a single payment, you’ll find yourself looking at a much higher interest rate on what is likely to be a much larger balance. This is particularly true if you consolidate a number of cards into one.
- Fees can be many and quite high.If you don’t read the terms carefully, in addition to a balance transfer fee, you could be looking at an annual fee just to have the card. When these charges are added to the balance you transfer, they could be far more expensive than what you’re dealing with on your current card.
- Introductory rates can be deceptive. If you focus on the big red number on the offer and don’t read the fine print, you could wind up paying an exorbitant amount of interest on the balance you transfer. There might also be a balance transfer fee with which you’ll need to comply. If that transfer fee is five percent on a balance of $10,000, your credit card debt just increased by $500.
- You’ll get a larger credit limit.On the face of it, this might sound like a good thing. However, keep in mind the balance of the card from which you did the transfer is now zero. Thus, you now have whatever the limit was on the old card, plus what’s left of the limit that came with the new card available to use. This means you can get even deeper in debt if you aren’t careful.
- Your credit score could take a hit. If you do a balance transfer to a new card and close the old card, you’ll abbreviate your credit history. When you close the old card, it will no longer count toward the overall length of your credit history. This can lower your credit score. Further, if the transferred amount consumes too much of the new card’s limit, your credit utilization ratio will go up. This can also lower your credit score, making you less qualified for favorable interest rates.
- Deferred interest can really pile up.If the new card comes with a deferred interest clause and you don’t pay the transfer off before it kicks in, you’ll be on the hook for all of the interest that accrued from day one through the date the interest becomes due. This can be a very significant amount on a large balance. If you can’t pay the transfer off in full before the deferment ends, it’s probably not worth taking.
As you can see, there are a number of credit card balance transfer pitfalls you’ll need to avoid. If you’re considering a transfer to deal with what has become unmanageable debt, there are other solutions to consider.
One of these is working with a debt settlement company to reduce your outstanding balances and get them paid off. However, before you decide on one, look for information such as these Freedom Debt Relief reviews to help you choose an effective organization with which to work.
Now that you understand what’s being offered, you can avoid possible credit card balance transfer pitfalls and choose the option that works best for you.