Make your payments on time, pay off the balance during the introductory period, and avoid future debt
One common method that people use when trying to get out of credit card debt is transferring their card balance to one or more balance transfer cards, which have a zero percent interest rate.
When it's done right, this process can help you get out of debt faster and for less money in interest. If you're not careful, however, balance transfer cards can just lead you to dig another hole of debt.
How can you avoid this? Simple—learn about the many traps that balance transfer cards may come with.
Balance Transfer Traps
- Forgetting about Transfer Fees
- Using the Card
- Making a Late Payment
- Not Changing Your Spending Habits
Although balance transfer cards won't charge you interest, you will likely still have to pay a small 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.
"You're receiving a zero percent APR, but if you're paying three to five percent in fees, your savings are not as much over time," says Navy Federal Credit Union Vice President of Credit Cards Randy Hopper. "Know your fee structure."
Isn't the point of a credit card to buy products and services? Not when it comes to a balance transfer card—at least not as long as you've still got debt to pay off. Once you transfer the balance from your old card, if you put any new charges on the balance transfer card, you will have to pay interest on the new charges. Once the balance is on 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 zero percent 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 zero percent period, you'll have to pay the rest of it at the card's normal rate.
And speaking of paying off the balance…
What's the point of transferring your credit card balance to a new card in order to pay off debt if you just keep on racking up more debt?
There isn't one. Balance transfer cards are meant to help you re-gain control of your finances, not dig yourself another hole of debt. 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.