A promotional offer to transfer high-interest balances to a credit card with a lower annual percentage rate may seem like the solution to your debt problems. But before you make the jump to consolidate your debt on a new credit card, be aware of the fine print and potential pitfalls. Ignorance could turn out to be a very expensive mistake.
Mike Sullivan is a personal finance consultant and former spokesman for Take Charge America, a national nonprofit consumer credit counseling company based in Phoenix. He says balance transfers can be beneficial if done properly, but aren’t always worth it.
“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,” he says.
Here are six steps you should take to make sure you’re on the winning side of a balance transfer:
1. Figure out why you’re in debt.
“The balance transfer itself is an indication you have too much debt, and if you do, transferring it somewhere else may save you a few dollars, but it may also be a sign you are in trouble and have a bigger issue,” Sullivan says. “I often advise people to take care of underlying issues first.” Meet with a nonprofit credit counselor to create a budget and cut back on spending before transferring balances.
2. Factor in balance transfer fees.
While there are a few cards that allow you to transfer a balance without a fee, most charge 3 to 5 percent of the amount transferred. It helps to do that math to see if moving the debt is worthwhile. Use CreditCards.com’s balance transfer calculator to see if the fee will wipe out any savings.
3. Avoid using the card for purchases or cash advances.
Your goal in taking out a balance transfer card is to lower your debt, not add to it. Put new purchases on another card, and by all means, avoid cash advances. The average cash advance APR is near 25 percent.
4. Beware of the bait-and-switch element.
This happens when you receive a balance transfer offer that you’ve been “preapproved” for, but when you submit the application, you find out you’re actually eligible for a credit line less than the balance you want to transfer. Getting a preapproved offer is no guarantee; you can still be turned down or get approved for an amount smaller than you expected. “If you intend to transfer all balances to this card, you may still find yourself stuck with debt,” Sullivan says.
5. Shop around for the best terms and rate.
Sullivan says it’s important to make sure you’re getting the best interest rate and terms you can. “Finding the right card is probably the best thing you can do. Teaser rates are fine, but I suggest going to websites and seeing which cards offer which rates.” Most balance transfer cards offer 0 percent APRs at a 3 percent fee for 12 months, 15 months or 18 months, but there are a few cards with promotional periods that last for 21 months, and the Chase Slate card is one that has no fee at all. For current deals, check out the 2017 Balance Transfer Survey and compare our best balance transfer cards.
6. Destroy the old and new card.
Closing the old credit card account probably isn’t a good idea, as that action may shorten your credit history and ding your score, unless you can’t handle the temptation to spend. Because closing the account also reduces your available credit, it may lower your credit score. Sullivan has an alternative suggestion: “Cut up the card instead.” He also suggests destroying the physical card on the new account, so you won’t be tempted to use it for purchases or cash advances (re-read tip No. 3) – use the new card strictly to pay off the balance. “We see too many of those folks who just can’t control their impulses,” Sullivan says.