Is a Balance Transfer Right for You?

October 14, 2019

By Sherry Keyles

If you are struggling to eliminate your credit card debt, a balance transfer can help. With a balance transfer, you move your existing debt from your current high-interest credit card to a new card with a 0% introductory APR period. You save money on interest and pay off your debt faster.

While a balance transfer credit card may sound like the perfect solution, you should proceed with caution. Balance transfer cards aren’t right for everyone. Before you apply, evaluate your financial situation to decide whether a balance transfer is the right choice for you. If you jump in without considering the consequences, you’ll add to your debt, not eliminate it.

Other options for paying off your debt include debt consolidation loans, If you find yourself in any of the following situations, you will want to find another option to pay off the debt, such as a debt consolidation loans, personal loans or home equity loans.

Your Debt is Extremely Large

Most balance transfer credit cards offer a 0% introductory APR for 12-18 months (the Citi Simplicity Card offers 21 months). If your debt is too large, you won’t be able to pay it off within the zero-interest period, After the 0% APR expires, you will have to pay the card’s ongoing interest rate, which can be as high as 27%.

In addition to paying at least the minimum payment amount each month, most credit card issuers impose a 3% or 5% fee on the amount transferred. If you have a large debt amount, the fee will make it even larger and put you at risk of paying the balance off before promotional offer expires.

Have Poor Credit

Balance transfer credit cards with typically require a very good to excellent credit score (FICO score 670 and higher) to qualify for a 0% introductory APR.  If you have bad credit or no credit at all, you are unlikely to be approved so it’s best to not even apply. Credit card issuers perform a hard credit inquiry every time you apply for a credit card. Applying for multiple credit cards, especially after you have already been denied, can lower your credit score even more.

You should focus on improving your credit score -  bring all of your accounts up to date, pay your bills on time, don’t close any credit card accounts and refrain from using credit for purchases.

Check your credit report to see what areas you need to improve. Many credit card issuers and banks offer free credit reports or you could contact one of the three credit bureaus: Equifax, Experian and TransUnion. Each agency is required to provide you a free credit report each year. Review your credit report for errors or fraudulent accounts, which could be lowering your score. If you find any inaccuracies, contact both the credit reporting agency and the information provider to request a correction.

Unable to Control Spending

Are you someone who has a habit of overspending? When you obtain a balance credit card, you should generally resist using credit for any purchases in order to prevent yourself from falling deeper into debt.

Only apply for a balance transfer credit card if you are confident you can control your spending. In order to resist temptation, stop using credit cards once you transfer your balance. Don’t close your existing credit card account as it will affect your credit utilization and lower your credit score. Instead, cut up your existing credit card and new balance transfer credit card. As an alternative, use cash or your debit card for purchases to avoid adding to your credit card debt.

No Debt-Elimination Plan

A balance transfer credit card alone won’t eliminate your debt. You need a firm plan to pay off the balance and you need to stick to it. Remember, a balance transfer can only help eliminate your debt as long as you pay it off before the 0% introductory APR period expires.

Start by doing the math to determine how much you can afford to pay each month. Figure out how much debt you have to pay off and divide by the number of months in a balance transfer card’s zero-interest offer period (15, 18 or 21 months). If the monthly payments are more than you can afford, you should investigate other options for reducing your debt.

Can Pay the Debt Off in a Few Months

If your debt is small and can be paid off in a few months, a balance transfer is probably not worth it since most balance transfer credit cards charge a fee on the transferred amount. It may be more cost-effective to continue to pay off your debt at the current interest rate. Balance transfer credit cards can be extremely helpful for paying off credit card debt but it’s not always the best solution. Everyone’s financial situation is unique. It’s important to take the time to evaluate if a balance transfer credit card is right for you. Use the situations in this article to help you make your decision. If you make the wrong choice, you may end up with more debt than when you started.

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