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If you've racked up debt on a high-interest credit card, transferring the balance to a card with a lower interest rate may sound like an enticing way to save cash, but it's not quite as simple as it sounds. Here are the nine things you need to know before you make the big switch to a balance transfer credit card.
1. Transferring isn't the same as repaying. When you use a balance transfer card, you are, in essence, paying off credit card "A" with new credit card "B." For example, if you've been paying 13 percent interest on a $2,000 debt, you'd have to make a $347 monthly payment for six months to pay off the debt. Transfer that $2,000 to a 0 percent card and your payments will be $334, saving $77 in interest in the process. "The only real, solid, definable benefit from a balance transfer is you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate, including all your costs," says Mike Sullivan, director of education for Take Charge America, a Phoenix-based nonprofit consumer credit counseling company.
2. Consolidating simplifies payments. Another reason to transfer balances to a single low-interest credit card is to simplify your financial life. If you've maxed out multiple credit cards, can't keep payment dates and minimum payments straight and often accrue late fees, putting all your credit card debt on one card may be a good move. You'll have just one card to keep track of and one payment to make each month.
3. You may transfer other debts, not just credit cards. It's not just balances from other credit cards that can be transferred. You may be able to move loans for cars, appliances, furniture and other monthly installment payments to a no-interest balance transfer credit card, using checks from the bank that issues the credit card.
4. Fees are inevitable. It isn't quite as simple as making a swap from a high interest rate to a low interest rate anymore. You will almost always be charged a balance transfer fee, which is determined as a percentage of the total amount you're transferring. In the past, transfer fees were capped. Today, on most balance transfer cards, there is no cap, so the more you transfer, the bigger the fee. A typical fee in 2015 is 3 percent, so if you transfer a $10,000 debt from another card, you'll pay a $300 fee right away. Even if you have the cash to do so, it might or might not be worth it, depending on how much money you'll save on interest over the life of your debt. See if it makes sense for you using a balance transfer calculator
5. Transfer rates expire. A balance transfer card woos you with an extra-low annual percentage rate (APR) between 0 percent and 5 percent. That teaser rate, however, doesn't last forever. After a set period -- often a six months to a year, occasionally more, the interest rate will increase, probably to somewhere in the range of 12 percent to 18 percent -- perhaps even worse than the interest rate you were trying to get away from. Make a misstep, such as letting payments lag, and your great rate will disappear and in its place will appear the higher "go-to" rate.
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BALANCE TRANSFER TRAP
Balance transfers can be complex, but you can cut through the clutter:
6. Careful with new purchases. Just because the balance you transferred to the new card gets a free pass with perhaps a 0 percent interest rate right now doesn't mean new purchases on the card will be interest-free too. Some balance transfer credit cards' rules specify that only transferred balances qualify for the lower rate, while new purchases collect interest at the regular, higher APR. Some cards do apply the introductory interest rate to new purchases too, but often only for the first six months.
7. Payments are allocated; learn how. To make matters more complicated, you can't tell your card issuer how to apply your payments if you have both a 0 percent balance transfer balance and a new purchase balance at a higher rate on the same card. According to the Credit CARD Act of 2009, issuers are required to apply any amount in excess of the minimum payment to the debt with the highest interest first. Most issuers will apply your total minimum amount payment to the lowest interest debt first, which will draw out the repayment time (and interest charges) on the higher interest debt. Because of this, it may be best to avoid using a balance transfer card for any new purchases to avoid dual-interest-rate balances.
8. Repeat transfer? Don't bet on it. You may think applying for a new balance transfer card when your teaser rate expires is the perfect solution to avoid ever paying interest on your credit card debt. Moves like that can damage your overall credit score. When you continue to open new low-interest accounts, but maintain high debt levels, lenders may see you as a risk, which will make it hard for you to borrow money for big-ticket items such as a home or car.
9. Good credit required to qualify. Zero interest balance transfer cards were widely available before the recession, but became rarer and less generous during it. They're now common again, but the best terms are available only to those with good or excellent credit. If you can qualify, and if it'll save you significant cash or help you pay off your debt sooner, it might be the way to go.