Low-Rate Balance Transfer Offers Decoded
Credit card issuers love sending direct mail to solicit new cardholders, so you might be used to seeing a lot of credit card offers in the mail. Some of these have special, limited time rates for new cardholders who transfer balances onto the new card. Others contain balance transfer checks that give you special limited-time interest rates for your current credit card. But what's the difference between these, and should you take advantage of these offers? Let's decode them.
Balance transfer offers let you transfer outstanding debt to a credit card. Many times these offers are only good for the card issuer's new customers, so you have to apply for and open a new credit card account in order to get the deal.
The first question to ask in this case is whether or not you really need another credit card. Sometimes the answer to this is yes, but it can also be no. Keep in mind that applying for a new card can trigger an inquiry on one of your credit reports. Having a new card on your credit report will also lower your credit score because you'll have a lower average age of credit on your history.
None of that is a deal breaker, but if you're going to be applying for some other kind of loan, you'll need to take that into consideration, as that other loan approval and terms will be based on your credit history.
However, having a lot of outstanding debt on your credit history can also make it tough to obtain other loans, so balance transfer offers can help you eliminate that debt more quickly because they offer low-to-no interest for a set period of time. Because you're not paying interest, your monthly payment goes to paying the principal amount, and you can pay down that outstanding balance more quickly and more cheaply.
Sometimes your current credit card will also give a zero percent balance transfer offer to transfer other credit card balances onto that card. This gives you the same luxury of having several months--sometimes even up to 21 months--to pay off your debt, but you don't need to get another credit card.
While have zero percent interest can help you pay off debt, it's important to make sure it's actually a good deal for you. Many balance transfer offers assess a fee for making the transfer. This can be a flat rate or a percentage--usually around three to five percent--of the balance you're transferring. It's wise to do some math ahead of time and figure out how much interest you'd pay in both cases, whether or not you take the balance transfer offer. If you're not going to save more than that in interest charges, then it might not be worth it to accept the offer.
Another item to note is the interest rate you'll be charged once the balance transfer period is over and whether or not the amount you transfer will still accrue interest while the offer period is on. Sometimes the offers will continue to accrue interest on the outstanding balance, but you won't be charged if you pay the balance in full by the end of the introductory period. If you still have a balance after the promotional rate has ended, you might have to pay all of the interest that has accrued during that time. Be sure to read the card terms and fine print to know what will happen in case you can't pay off that balance.
Along with knowing whether or not you'll pay accrued interest, know what the APR will be once the promotional period has ended. It could be higher than the credit cards you currently have, and you could wind up paying more in interest than you'd expected.
It's also a good idea to be careful about offers that have both a zero percent balance transfer and zero percent on new purchases. If you're already trying to pay off a large amount of debt, potentially adding new debt--even if it's at zero percent--might make it difficult to get out of the debt trap.
As always, read the fine print of any credit card offer and do the math to make sure you know what you're paying in interest. A low- or no-fee APR sounds attractive, but once the promotional period is over, a standard credit card APR is much higher than the rates on mortgages, auto loans and other personal loans, and it's not in your best interest to pay high rates for the opportunity to buy things on credit.