How to avoid 5 traps of balance transfer cards
The offers are enticing. Get out of debt, save money and simplify your financial life by transferring your credit card balance or other debt to a 0 percent interest balance transfer credit card.
Yes, there are advantages with 0 percent balance transfer cards – often breathing room of anywhere from nine to 21 months to pay off what you owe – but there are traps, too.
For example, if your payment arrives after the due date, you may lose the great interest rate that enticed you in the first place.
Here is how to avoid five traps of balance transfer cards:
1. Not factoring in transfer fees.
The balance transfer fee to move your debt to that 0 percent interest balance transfer card usually ranges from 3 to 5 percent, though the Chase Slate is one of a few cards with no balance transfer fee.
You’re receiving a 0 percent APR, but if you’re paying 3 to 5 percent in fees, your savings are not as much over time. Know your fee structure.
|— Randy Hopper
Vice president of credit cards
at Navy Federal Credit Union
“You’re receiving a 0 percent APR, but if you’re paying 3 to 5 percent in fees, your savings are not as much over time,” says Randy Hopper, vice president of credit cards at Navy Federal Credit Union. “Know your fee structure.”
Know, too, if your introductory balance transfer offer applies to only the amount transferred. Read the fine print.
Some balance transfer credit cards’ rules specify that only transferred balances qualify for the 0 percent rate, while new purchases collect interest at the regular, higher APR, says Manisha Thakor, director of wealth strategies for women at the BAM Alliance financial advisers.
2. Losing that great rate.
Make a payment late, even a day late, and you may cancel that 0 percent introductory interest rate. Bank rules vary, so be sure you know what will happen if you pay late.
If you lose your introductory rate, you’ll pay the card’s regular interest rate, ranging anywhere from 11.24 percent to north of 25 percent.
And if you don’t pay off your debt before the 0 percent period expires, you’ll be paying interest at that higher regular rate – a rate that may be higher than the interest you were paying before the balance transfer.
3. Forgetting to make payments.
“You have to be vigilant about your credit cards, especially if you’re doing 0 percent balance transfers,” says Leah Ingram, author of “Suddenly Frugal” and the SuddenlyFrugal.com blog.
Ingram and her husband got a Home Depot card offering a promotional 0 percent interest.
“We did some home renovations,” Ingram says. “We had a six-month interest-free loan from Home Depot.”
Thinking you are ‘fixing the problem’ by transferring an existing balance to a 0 percent card could prevent you from identifying deeper, more systemic imbalances in your financial habits.
|— Manisha Thakor
Director of wealth strategies for women
at The BAM Alliance financial advisers
The Home Depot card – while a deferred interest card and not a balance transfer card – required the same diligence to make payments on time so as not to risk losing the 0 percent interest rate. Ingram set up reminders on her calendar and mobile devices to make sure she paid early.
You also can avoid late payments by setting up autopay for at least the minimum monthly payment, adds Thakor.
4. Not paying off the balance during the introductory period.
If you get a balance transfer card to get out of debt but continue to spend freely, that’s defeating the purpose.
The whole aim of a balance transfer card is to buy you breathing room to pay off your balance so you can start fresh, Thakor says.
5. Not addressing the financial problems that got you in debt.
When that transferred balance is erased, review how you built up that much debt in the first place.
“It may be due to a truly unforeseen emergency, such as a health issue,” Thakor says. “But it may also be a sign that your spending is out of alignment with your income.”
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