You’ve probably seen the ads: “0% interest for the first 12 months!” for a new credit card. Sounds too good to be true, right?
These are ads for balance transfer credit cards, and it’s true, they do offer 0% interest for a promotional period (usually between six and 12 months). Here’s what you need to know about them:
Balance transfer credit card offers initially started popping up as a way for lenders to attract new business. The idea is that when you get the credit card, you transfer your debt to this new card where it doesn’t accumulate interest. During the promotional period you make payments on your debt, eventually paying it off. Then, at the end of the promotional period, the lender is hoping you’ll stay with them and continue to use the credit card at standard credit card interest rates.
While it’s true that balance transfer credit cards can be an excellent way to jumpstart your debt repayment and get temporary relief from high credit card interest rates, they have several drawbacks. Let’s look at the pros and cons to help you determine if a balance transfer credit card is a good way to pay off your debt.
How balance transfer credit cards work
When you do a balance transfer, you use one credit card to pay off another credit card. For example, if you have $8,000 worth of credit card debt on a credit card at 19.99% interest, you could transfer that balance to a balance transfer credit card at 0% interest for 12 months. You still have the same balance, but you’ll pay far less interest over those 12 months. After the promotional period is over, the interest rate goes up.
The pros of balance transfer credit cards
At first glance, a balance transfer credit card seems like a great way to reduce the interest being charged on your debt while you’re paying if off, but just how much can you save?
If you have $5,000 on your credit card at an interest rate of 19.99%, you’ll pay $999.50 in interest over the course of a year. If you transfer that balance to a 0% interest credit card, you’ll save that amount. That’s can add up to a lot of savings. If you put the amount saved towards principle repayment you can also pay off your credit card debt faster.
Another benefit of balance transfer cards is that if you have several credit cards with high-interest debt, you can shift all of the balances to your balance transfer credit card and focus all of your effort on paying off that one card. Having a single monthly debt payment helps narrow your focus.
But balance transfer credit cards aren’t without their drawbacks. Here are the reasons you should approach these credit cards with caution.
The cons of balance transfer credit cards
Balance transfer credit cards will often charge a transfer fee of between 1% and 4% of the balance. This fee is added to your total balance.
For example, if you transferred $5,000, you’ll be charged a fee of between $50 and $200. Your new balance will be between $5,050 and $5,200.
You should also know that if you miss a payment or fail to pay off the balance before the promotional period ends, you’ll have to pay interest on the entire original balance. So make sure you have a plan in place to pay off your debt before the promotional period ends.
It’s also important to note that the 0% interest rate is for the balance transfer only, and not for additional purchases. For example, if you transfer $5,000 to your balance transfer credit card, that amount will not be charged interest. But if you buy an item for $100, that $100 will be subject to the regular interest rate on the credit card, which is usually 19.99%.
Finally, a balance transfer credit card presents the temptation to run up the balances on your other credit cards. To avoid this, make sure to lower the limits on the credit cards you just paid off—or get rid of them entirely. However, do keep your oldest one to protect your credit score.
The final word on balance transfer credit cards
If you have a large credit card balance that’s racking up interest, you should look into balance transfer credit cards. But before you apply for one, make sure you have a solid, actionable plan on how you’re going to pay off the entire balance before the promotional period is up.
If you’re unsure of your ability to pay off the entire balance, you should think twice about using a balance transfer credit card. Consider other options, like moving your high-interest debt to a line of credit or a low-rate credit card, or moving a smaller portion of your debt to the balance transfer credit card.
In conclusion, a balance transfer credit card can be an excellent tool for paying down high-interest debt, but only if you use it wisely, pay off your credit card in full, and don’t run up the balances on your other credit cards.
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