Balance transfer credit cards are a great tool to help you pay off your credit card debt while saving money on interest. However, if you aren’t careful, balance transfer cards can put you further into to debt.
To protect yourself, use your card wisely once the balance transfer is complete. The following tips can help ensure you don’t run into any unexpected issues as you pay down your debt.
1. Zero Out Your Old Balances
When you transfer balances from another credit card or loan, make sure the balances are down to zero. If any part of your balance doesn’t transfer, you will incur late fees and penalties on the amount. Pay off any remaining balances as soon as possible. Make sure you go into your account to confirm the balance is at zero.
2. Keep Old Credit Card Open
Do not close your old credit card account as it may hurt your credit score. Instead, keep the account open (with a zero balance) as long as the card doesn’t charge an annual fee. The length of your credit history is an important factor in determining your FICO credit score. Closing an account will shorten your credit history, which will lower your credit score in the short term.
Closing your old card can also hurt your utilization rate, which is also a big factor in your credit card. Credit utilization is the amount of the total credit limit you use. If you owe money on other credit cards or loans, closing an old account with a high credit limit will push your utilization rate higher.
3. Cut Up Your New Card
The point of a balance transfer credit card is to help you get out of debt. If you make purchases on your new card, you may put yourself further into debt. While your card may offer a 0% APR on purchases, it’s still a good idea to resist. Adding to your debt may cause you to extend your balance past the 0% APR introductory offer. You will then have to pay a much higher interest rate on the new purchases.
If you do have to make any purchases, you should consider using your old credit card rather than using your new balance transfer card. However, you will want to pay the balance in full to avoid incurring interest.
To avoid any temptation to use your card, you should cut it up. You can always get a new one if necessary.
4. Pay More than the Minimum Amount Each Month
Even though you have a 0% interest rate, you still need to make a minimum payment each month. The amount rarely allows you to pay the entire debt by the end of the introductory offer. You should pay more than the minimum amount each statement period to ensure you can pay the balances off in time.
5. Create a Backup Plan
Balance transfer cards with introductory 0% APR introductory offers are great for saving money on interest as long as you pay off your balances before the period ends.
If you don’t pay off your balance before the introductory period ends, any balance remaining will be charged the standard interest rate.
To avoid having to pay the much higher interest rate on the remaining balance, you should create a backup plan in case you are unable to pay all your debt by the end of the introductory period. Some options include:
- Apply for another balance transfer credit card to take advantage of another 0% introductory APR offer. Remember, balances can’t be transferred between issuers.
- Take out a personal loan to consolidate your debt
Create a reminder for two months before the end of the introductory period so you can evaluate your situation and institute your backup plan if necessary.
6. Set Up Automatic Payments
Late or missing payments can be costly – to your wallet and to your credit score. In addition to incurring late fees, some balance transfer credit cards reserve the right to cancel your promotional interest rate if you make a late payment or miss a payment altogether. If your payment is over 60 days late, you could even end up with a penalty rate, which is often around 30%. To avoid these problems, set up automatic payments to ensure you pay your balance on time. In addition to helping you avoid late fees a perfect payment history may help you build good credit.
7. Create a Budget Now is the time to work on the what got you into debt in the first place. The first step is to figure out what went wrong the last time. Start by tracking your monthly spending to see what may have caused you problems previously. Once you understand your spending, set realistic spending limits and create a written budget to follow.