The balance transfer “game” has become the way of life for many Americans; transferring debt from one credit card to another to avoid paying interest. Sometimes this is a smart move, other times it’s not. Here are five things you should know about this technique:
1. Balance Transfer Fee
Nowadays, almost every credit card charges what is known as a balance transfer fee; often 3% to 5% of the amount transferred. If you transfer the balance once every 6 months, that means you are paying 6% to 10% for this fee alone. It’s important to keep this in mind.
2. Minimum Payment Amount
What percentage of the balance are you required to pay each month? This is typically between 2% to 4% each month, depending on which country you live and which bank issues the card. However since the credit crunch, some banks are now imposing a minimum 5% payment each month. Make sure you know this information before you apply for a credit card.
3. Duration of Promotional Rate
Balance transfer deals aren’t what they used to be; credit card reviews point out that the lending requirements are tighter and the promotional periods are shorter. Nowadays, the longest interest-free offers advertised are only 12 months long. A few years ago, it was possible to get up to 18 months without interest. Since you will be charged a fee each time you transfer a balance, it’s important to get the longest 0% offer possible.
4. Different Interest Rate Categories
Does the promotional rate apply to purchases or transfers? Typically it’s only applicable to transfers. Sometimes they give you a special rate on purchases too, but it’s usually for a shorter period of time. If you plan to use the card for spending, look for those which give you a deal on both categories.
5. Credit Limits
For FICO scoring purposes, many financial experts advise against using more than 30% of the available credit on any given card. According to this rule, that means one can only carry a $3,000 balance on a credit card with a $10,000 limit. Although it’s impossible to know what your limit will be before applying, it’s a good idea to consult online credit card reviews and forums to see what others are getting for a specific card.
Remember, balance transfers can be an excellent way to save on interest, but you should never let them become an excuse to delay payment of your debt. The sooner you can pay off your credit card debt, the better off you will be.