Balance transfer credit cards with 0% introductory APR offers are great tools to help you dig out of your credit card debt. Not only does a balance transfer help reduce your deb faster, it also simplifies your payments and saves you money on interest. However, if you aren’t careful, you can end up in more debt than when you started.
Keep in mind credit card issuers aren’t offering 0% introductory APR to be nice; they want to make a profit. They are hoping you will use the card for purchases, miss a payment or keep a balance after the introductory offer expires. Any of these actions will add force you to pay fees or higher APR.
If you are going to apply for a balance transfer card to eliminate your debt, make sure it benefits you and not the card issuer. Here are some important guidelines to ensure you use your balance transfer credit card responsibly:
Read the Fine Print
Before you apply for a balance transfer credit card, read the card’s terms and conditions to understand the guidelines for making a balance transfer and the consequences of not complying with the rules.
Things to look for include: length of the introductory offer, balance transfer fee amount, time limits for transferring the balance, standard APR to be applied after the 0% APR offer expires, late fees, penalty APR and any other fees such as an annual fee or foreign transaction fee.
Not following the terms correctly can result in you losing the introductory APR and having to pay a very high interest rate on your balance. Make sure to keep a copy of the terms and conditions in your records.
Avoid Cash Advances
Confirm you signed up for a balance transfer and not a cash advance. Credit card companies send out access checks for both balance transfers and case advances – sometimes in the same envelope. Cash advances come with very high interest and fees. If you plan to use an access check to make a balance transfer, ensure you are using the right one.
Do the Math
While a balance transfer saves you interest during the introductory period, there are some costs to consider. The card issuer will charge a fee on the amount transferred (generally 3% or 5%) and you will have to pay a higher interest rate (as high as 24%) if you don’t pay off your balance before the introductory period expires
Before making a balance transfer, do the math and figure out whether the savings outweigh any costs. To determine how much you will save (or lose), consider the size of your debt, the interest rate you are paying on your current card, the amount can afford to pay each month and the balance transfer fee.
Keep Your Old Card Open
Once you transfer your balance to your new card, you may think about closing your old credit card account. However, it’s generally a good idea to keep the card open. Closing the account could hurt your credit score by reducing your available credit. In calculating your credit score, credit reporting agencies consider your credit utilization, which is the amount of credit used compared to the amount of credit you have available. When you close a card, your credit utilization ratio goes up, which can lower your credit score.
The only exceptions are if the card has an annual fee or you are afraid of the temptation to use the card for purchases. If you are going to close the card, confirm the full balance transferred before you cancel. The good news is if you do close your card, your credit score may go down but using a balance transfer to pay down your debt will eventually raise your score.
Don’t Make Purchases with the New Card
Since you opened the new card to take advantage of the zero-interest balance transfer, you should not make additional purchases on the card. Adding more debt will put you further behind in paying off your balance before the introductory period ends. Adding more debt will not help you reach your goal.
New purchases are often not included in the introductory offer so you will pay high interest on them. If you need to buy on credit, use your old card. Some cards do also offer a 0% introductory APR on purchases as well. The purchase offer period is usually shorter than the balance transfer offer. However, you are still better off not adding to your balance as it may make it harder to pay off by the introductory offer expiration date.
Make Payments on Time
Missing a payment is a problem on any credit card as late fees and penalty APR (around 30%) may be imposed. With a balance transfer card, missing a payment has severe consequences. If your payment is late – even by one day- the introductory offer will be cancelled and the regular purchase APR will be applied to the remaining balance.
In addition, the issuer may charge a late fee for any missed payment and impose a penalty rate of 30% on payments over 60 days late. Set up automatic payments to ensure you pay the balance on time.
Stay Focused on the Introductory Offer Expiration Date
Keep a close eye on your balance transfer account to ensure you pay off the balance before introductory period expires. If you still have a balance left, the issuer will apply the standard interest rate which could be as high as 24%. To avoid any issues, put a reminder on your calendar several months before the introductory period ends so you can assess whether or not you will reach your goal. If not, you may need to pay a higher balance each month.