Risks Of A Balance Transfer Credit Card
If you carry out your plan and pay your balance off before the end of your new cards low interest or no interest promotion, you will reduce or eliminate your credit card debt without paying interest. Thats a great outcome, but things dont always work according to your plan. Here are some things that can go wrong.;
- You could fail to consider the fees. Many balance transfer cards have annual fees, and some may also charge a fee every time you transfer a balance. These fees might also activate if you ever miss a payment during the promotional period. Make sure you make all your payments on time and that additional fees arent eating up your potential interest savings.;
- You could miss a payment on your old card. The balance transfer process takes up to a week to complete, and if a payment falls due during that period you might think the balance transfer is complete and overlook it. That late payment could hurt your credit, even if the entire balance is subsequently paid off.;
- You may keep spending on your old cards. The purpose of getting a balance transfer card is to remove those interest-bearing balances so you can focus on paying off the principal. That wont work if you go out and load up your old cards again.;
Many people who get a balance transfer card with good intentions fall into these traps. They often find themselves unable to pay off the balances they have transferred and sometimes end up even deeper in debt than they were before.;
When A Balance Transfer Might Be A Good Choice
Balance transfers arent the right fit for everyone, no matter how attractive the offer. However, a balance transfer card might work for you under the following circumstances.
- You find a balance transfer offer that can save you money. The point of a balance transfer is to consolidate debt, save money, and pay down your high-interest debt. So, youll want to crunch the numbers, including balance transfer fees, to make sure that a balance transfer credit card offer makes good financial sense before you apply.
- You have a debt elimination strategy. Its critical to use balance transfers the right way. They should be tools to help you pay down debt, not a temptation to go further into the hole.
- Your credit rating is healthy enough to qualify for a new balance transfer credit card. Most card issuers require you to have good to excellent credit if you want to qualify for a new balance transfer credit card. However, some credit card companies have balance transfers offers for fair credit that may be worth reviewing.
- The balance transfer card youre considering isnt with the same bank. Most credit card issuers wont let you move debt from an existing credit card to a new one from the same issuer. That said, some allow you to receive cash into your checking account, which you could then use to pay your bills as you see fit.
Negative Credit Score Impact: Repeatedly Opening Cards And Transferring Balances
Balance transfers will hurt your credit score if you make a habit of opening new credit cards and repeatedly transferring balances between them.
This approach seems enticing: why not just avoid paying interest for as long as you can by transferring your balances again and again?
But cycling through new cards is bad for your long-term financial health. Constantly opening new credit cards results in many hard inquiries and reduces your average account ageand could hurt your credit.
If you continue to roll your balances into new cards, your credit score could eventually be lowered to the point that you won’t qualify for any new credit . Not only that, your balance transfer fees could add up over time, minimizing the savings you get by reducing your interest rates.
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The Bottom Line On Balance Transfers And Your Credit Scores
There are a few ways a balance transfer might impact your credit. If a simplified, lower monthly payment helps you pay off your debt, you might see your credit scores improve. But if you apply for multiple cards in a short period of time or close your oldest line of credit, you might see negative effects on your credit.
And donât forget that there are other things you should consider in addition to your credit scores. Balance transfers may come with fees. And they may come with introductory or promotional rates that expire after a period of time. So make sure you understand how balance transfers work. With enough knowledge, you can make a decision thatâs right for you.
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Negative Effect On Credit
Fees add up. Most balance transfer cards come with fees, usually between 2% to 5% of the balance transferred, per transfer. That means, if youre transferring $5,000, your balance transfer fee would be between $100 and $250. These fees are added to your balance and can add up with multiple transfers. The increased debt can also increase your credit utilization ratio. As we learned earlier, this increase can lower your credit score.;
New Credit. Each time you apply for a credit card, you go through a hard credit inquiry. Many requests over a short period of time will result in a drop in your credit score. To minimize the impact, choose a balance transfer card and apply to one. Your score will lower a few points for the one inquiry and will stay on your credit report for two years.;
Even though new credit activity accounts for 10% of your credit score, the higher weight granted to paying off debt and making on-time payments outweighs the temporary hit you will take on your score with one credit check. If you dont use the balance transfer card to pay down debt and miss timely payments, you will hurt your credit score long-term since the benefits wont counter the negative effect of the credit check.;
What To Do After Transferring A Credit Card Balance
After your credit card issuer transfers your balance to your new credit card, its important to focus on paying off that debt as soon as possible. Assuming that your balance credit card comes with a 0% introductory rate, its in your best interest to try and pay off your debt in full before that period comes to an end. If your monthly payment is at least 60 days late, your credit card issuer might cancel your 0% interest offer. If that happens, you could be expected to start paying interest on the unpaid charges from your balance transfers during the next billing cycle.
Youll also need to do whatever you can to avoid using your balance transfer credit card to make additional purchases. Thats not what its for!
How To Evaluate 0% Balance Transfer Credit Card Offers
A 0% balance transfer promotion can be beneficial to consumers who want to pay off their credit card debt and reduce how much theyre spending on interest payments. Unfortunately, 0% balance transfer offers usually dont last forever.
Once your 0% balance transfer offer ends, your balance transfers will be subject to the cards regular rate, which can be as high as 20%. Thats why its important to pay close attention to the length of the promotional period. The longer the introductory period, the better. A good balance credit card should have a 0% offer that lasts for 12 months, at the very least.
When comparing 0% balance transfer credit card offers, youll also need to assess the terms and conditions associated with individual cards. Transferring balances might be free for 12 months. But during that period, you may owe interest if you use your credit card to purchase new items and you carry a balance. Reading the fine print should give you an idea of how a particular introductory offer will work.
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Avoid Purchasing Too Much
Purchasing things during the balance transfer period is a big no since it will just worsen your debt.;
The repayments youll make will likely go to your purchase if the rate of your balance transfer rate is 0%. This means that the repayments you are making are being used to pay off the purchase instead of going to your debt.
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A balance transfer affects your credit in the sense that repaying credit debt improves your credit score. So a reduced credit utilization improves credit.
No, balance transfers are not inherently bad, but they can be bad for your finances if used recklessly. When you transfer a balance, you’re ideally shifting high-interest debt to a credit card with a lower interest rate. The best balance transfer credit cards feature 0% APR offers for a specific number of months, but these introductory APRs eventually expire. If there’s a balance remaining at the end of the introductory period, it will accrue interest daily at the card’s regular APR. And if you’re late in paying, the issuer could revoke the introductory APR. Your remaining balance would then be subject to the regular APR or even a higher read full answerpenalty APR in some cases.
Opening a balance transfer credit card account may affect your credit score because it can trigger a hard inquiry on your credit report. But that’s the case with most credit cards. The most important thing is to use a balance transfer to reduce the cost of your debt, not just prolong spending habits that really can’t last in the long run. So avoid repeated balance transfers. While you may get a break on interest for a while, this practice may limit your chances of getting approved for another balance transfer card in the future.
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Who Should Apply For A Balance Transfer Credit Card
Balance transfer credit cards arent for everyone. In fact, theyre usually geared toward consumers with good or excellent credit scores. According to the FICO scoring model , this means that your credit score may need to fall between 670 and 850 if you want to qualify for a balance transfer credit card and be eligible for the best rates. Under the VantageScore model, your credit score would have to fall between 700 and 850 to be considered good or excellent.
Incorporating a balance transfer credit card into your debt repayment strategy could also be effective if high interest rates are keeping you from being able to pay off your principal balances. Having a concrete plan, however, is the key to making the most of a balance transfer credit card. This kind of card wouldnt be helpful for someone who doesnt know how to budget their money or come up with a practical way to pay off the debt they transfer before the 0% interest period expires.
A balance transfer credit card isnt a good fit for anyone whos planning to transfer balances back and forth or sign up for 0% interest credit cards as often as possible. Without making an effort to pay off your debt, signing up for a balance transfer credit card would be pointless. You might be better off consolidating your debt using a debt management program or a personal loan.
New Account Opening Aka Time In File
Another factor that impacts your credit scores is the age of your credit card accounts.
If your application is approved, youll receive a new credit card and the card issuer will begin reporting the new account on your credit reports.
Your length of credit history is largely responsible for fifteen percent of your total FICO score. Credit scoring models consider the date each of your credit accounts were opened to determine the age of each account individually and the average age of your accounts in aggregate. You may see a slight drop in your credit scores when you open a new account due to this factor. Yet, as with the inquiry, the credit score impact is typically minor.
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How Does A Balance Transfer Negatively Affect Your Credit Score
A balance transfer can cause a dip in your credit score in the short run. When you apply for a balance transfer, lenders conduct a hard inquiry to determine if youre a capable borrower. Hard inquiries remain on your credit report for about two years. Several hard inquiries show youre seeking credit from too many sources, which could indicate you may not be a reliable borrower. This differs from a soft inquiry, which is when you check your credit or a lender is trying to pre-approve you. Soft inquiries do not affect your credit score.
Balance transfers can also lower your credit score by reducing the average age of your accounts. If you have three cards with an average account age of 48 months, and you decide to open a balance transfer card as your fourth, the average age of your accounts would lower, which could drop your score.
This has a minimal impact on your credit score, but its still critical to be aware of. Its imperative to keep old, unused accounts open to maximize the average age of your accounts.;But, if an old account has a high annual fee that you cant afford, then it might be in your best interest to close itweigh the pros and cons before closing the account.
Is A Balance Transfer Good Idea
A balance transfer allows you to move an existing balance from one or more credit cards to a single card usually one with a low or 0% introductory interest rate. But there are pros and cons to balance transfers.
Your level of debt wont change, but the main benefit is this: During a;0% interest introductory period, your debt wont grow with interest charges while you work to get it under control.
The best balance transfer credit cards typically offer a 0% intro annual percentage rate for a specified period, usually 12 to 21 months.
Lets look at an example of how this works. Say you have the following cards in your wallet:
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Youre motivated, so you want to pay off the balances on Cards 1, 2 and 3 in the next 12 months. Transferring those balances onto Card 4, which has a 0% intro APR for the first 12 months, could save you up to $665 in interest.
Just dont forget to factor in the balance transfer fee when calculating your net savings. Balance transfer fees are typically 3% of the amount you wish to transfer.
You can use this balance transfer calculator to help you run scenarios to decide if a balance transfer card makes sense for you.
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What Is A Credit Card Balance Transfer
You might have heard the term balance transfer credit card, but a more accurate description is credit card offer favorable to balance transfers.
Pretty much any credit card will let you transfer a balance away from it. Many credit cards will let you transfer a balance to them as well.
Some credit cards, however, have terms that are more favorable for incoming balance transfers. These may include:
- Lower fees on incoming balance transfers
- Lower regular interest rate on balance transfers
How To Do A Balance Transfer With Discover
Balance transfers with Discover can be done by going to your online Discover account and following these steps:
The Drawbacks Of Balance Transfer Credit Cards
Despite the various benefits that balance transfer credit cards offer, there are downsides to applying for these kinds of cards. For example, 0% balance transfer card offers can be misleading. Sure, you wont pay interest on the balances you transfer from other cards. But in most cases, youll still have to pay a balance transfer fee. This means that the more money you transfer, the more youll pay in the long run.
Balance transfer credit cards can also leave consumers in a messy financial situation, especially if they fail to pay off their balances in full before the 0% interest introductory offer ends. Once that promotional period expires, eliminating credit card debt could be challenging . And in some cases, credit cardholders can be required to pay interest retroactively on any balance left over after the conclusion of the promotional period.
You could also run into problems if you get approved for a balance transfer credit card but you dont qualify for the terms that go along with a particular offer. If your credit score isnt high enough, for example, you could end up with a smaller credit line than the one that was advertised. That may prevent you from transferring all of the debt that you had planned to move onto your new balance transfer card. In that scenario, you would wind up with two credit cards that youd have to pay off . Plus, you wouldnt be able to save as much money on interest.