Avoid Balance Transfer Credit Card Traps That Can Increase Your Total Debt, Not Reduce It
Making your payments on time, paying the balance during the introductory period, and avoiding future debt are the best ways to stay on top of your debt problem
When trying to get out of credit card debt, many people want to transfer their card balances to one or more balance transfer cards, which often have a zero percent promotional interest rate. When used correctly, these cards can be a great way to help you get out of debt faster. But if you're not careful, balance transfer cards can put you further in the hole with a lot of unexpected fees and terms.
- Balance Transfer Fees Add Up Quickly
- Using the Card Accrues a Lot of Interest Charges
- Making a Late Payment Can Cancel Your Promotional Rate
- Not Changing Your Spending Habits Will Put You Back in the Same Place
Although balance transfer cards typically don't charge you interest (at first), you will likely still have to pay a fee to transfer your balance to the new card. If you don't pay attention, the cost of the fee could outweigh the benefit of the lack of interest charges. The fees vary, but they are often between 3% and 5% of the balance transfer. There is often a minimum fee per transfer regardless of the percentage. This fee can completely negate any savings from lowering your interest rate.
When you have a balance transfer credit card, don't use it. All new charges will accrue interest, and usually at a significantly higher rate than your balance transfer. Even worse, when you make a payment it is usually applied to portion of the balance with the lowest fees first. Once you have transferred a balance to the new card, lock it away until all the debt is paid off.
Although the rules vary according to the card issuer, chances are that even one late payment will result in the cancellation of your promotional interest rate. If that happens, you'll have to pay the card's normal interest rate, which will defeat the purpose of transferring your balance in the first place. In addition, if you haven't paid off the balance before the end of the promotional period, you'll have to pay the rest of it at the card's normal rate.
Balance transfer cards are meant to help you re-gain control of your finances, not dig yourself into another hole. As you pay the balance, look back over your spending history and habits and figure out how you managed to get so much debt in the first place. It's one thing if the expenses were unavoidable and necessary, such as an emergency health problem; it's another if they were frivolous little things, such as a daily trip to the coffee shop.
Before you finish paying your balance, put together a spending plan and a budget to help yourself stay on track for all future expenses. You don't want to pay off one balance only to have to transfer another.