Thinking about a balance transfer on your credit cards? Weigh these factors first before you call your bank.
Plastic is handy. But if you pay only the minimum balance on a credit card every month rather than the full balance, it can be pricey. (You could easily be shelling out today for a flat-screen TV you bought in 2011.) Plus, if your card has a high annual percentage rate, or APR (think 18 percent and up), it can feel impossible to rid yourself of debt. So it’s no wonder that 0 percent balance-transfer offers are so enticing. They allow you to move a balance from a credit card that charges interest to a card that doesn’t for a set amount of time. Should you bite?
The pros: A balance transfer can save you significant cash—hundreds or even thousands—especially since today’s offers have an introductory interest-free period that lasts up to 18 months, says Odysseas Papadimitriou, the chief executive of CardHub.com, a credit-card-comparison site. (At the bottom of the recession, most cards stopped offering interest-free promotions.) Case in point: If you have an outstanding balance of $5,000 on a card with an APR of 18 percent and you transfer it to a card with a 0 percent interest rate for 12 months and a transfer fee of 3 percent, you can save more than $800. (Estimate your savings at SmartBalanceTransfers.com.) Also, if you carry balances on several cards, moving all your unpaid debt to one card eliminates the hassle of making multiple payments each month.
The cons: You’re unlikely to qualify for a top-notch card if your credit score is below 720, says Bill Hardekopf, the CEO of LowCards.com, a credit-card-comparison site. (The average credit score for people approved for Discover’s Discover It card, which has a great balance-transfer offer, is 731.) Additionally, most cards charge a transfer fee of 3 to 4 percent of the balance being moved. (Check the card’s disclosure statement for the fee.) And if you’re late with a payment, you might forfeit the 0 percent period—meaning the interest rate could jump to an even higher percentage than your old APR.
The verdict: Worth it—assuming that you pay off a large chunk of the balance before the teaser rate expires, that your new APR (once it kicks in) is lower than the APR on your current card, and that your savings will offset the balance-transfer fee.