When it rains, it pours. True enough for so many aspects of our lives, including credit solicitations. If you're like most people, you've probably noticed that shortly after obtaining a loan or credit card, all of a sudden it seems that every lender on the planet wants to extend you credit. We are inundated with offers to consolidate our debts, refinance our mortgages, and buy new cars. This is particularly true with credit cards, so it's important that you understand the terms before playing the balance transfer game.
Should you transfer your credit card balances to a new card?
Credit card issuers mail about five billion solicitations to consumers each year, or approximately 50 offers per household! Many of these credit card offers try to entice us to transfer our balances to a new card by offering perks such as an increased credit limit, more frequent flier miles, and most often, low interest rates. These balance transfer offers can come in a few different forms. There is usually an area that asks you to list information about the balances you would like to transfer on the application you received in the mail or online. It is also very common for a credit card company to send consumers Balance Transfer Checks with the new credit card.
Although it may sound like a good deal, it's not always in the consumer's best interest to accept the offer. It all depends on exactly what the offer states. Many balance transfer offers use low introductory rates to entice us to transfer our balances. It is common to see an offer that states "1.9% Fixed APR*."? Notice the asterisk. The asterisk indicates that there are conditions on this offer that are spelled out in the fine print that's included in the paperwork. Before agreeing to any offer that may affect your credit or financial situation, make sure that you read every condition that comes along with the offer. Here are some of the more common conditions that are usually associated with balance transfer offers:
- The most common condition is that the low, fixed rate is only an introductory rate and will only last for a short time, typically six months. After this period is over, the rate will increase, sometimes dramatically.
- Another condition is that the low rate may only apply to the amount that you transfer to the new card. Any purchases or cash advances taken after the transfer would be subject to a higher rate.
- The fine print may also point out that even though you are being offered a low rate, you may not qualify for it and may be approved for a card with a higher rate.
- The asterisk may point you to the fact that the credit card company reserves the right to change any of the terms at any time, as long as they provide you with any notice required by law. In most cases, the card issuer can increase your interest rate, decrease your credit line, and even close your account at any time.
Let's review some common scenarios in which consumers find themselves, and determine if a balance transfer would be beneficial for each situation.
Scenario 1: The consumer has credit cards with manageable balances and low interest rates (10% or less).
This consumer would not derive a significant benefit from transferring his/her balances to another card. Paying off the balances owed now rather than getting more credit cards would better serve this consumer.
Scenario 2: The consumer owes a significant amount and is being charged average interest rates (13-16%).
This consumer may benefit from transferring balances under two conditions:
- If the interest rate on the new card is lower than the old card's rate, AFTER the introductory period, a transfer might make sense. For example, if the offer is 0% interest for 6 months and then 22% thereafter, the consumer will end up paying much more interest in the long run if he/she accepts the offer. However, if the rate is less than the consumer is being charged, a transfer could help them save money.
- If the consumer will close the old accounts, a balance transfer could be beneficial. This is very important since this consumer already owes a significant amount. If he/she transfers balances and then uses the old cards again, the debt load will become too large, erasing any benefit gained from the transfer.
Scenario 3: The consumer is overextended, has begun to fall behind, and is using balance transfer checks to make monthly payments.
This is a situation that many consumers find themselves in. If a consumer is having significant problems with credit card debt, transferring balances is not usually a good solution. Even though it seems to make sense to transfer balances to lower rate cards, consumers in this situation will not qualify for many low-rate credit cards. And at this point, moving debt around from one lender to another is not going to solve the problem. This consumer has to find a way to stop using credit cards and make a plan to pay them off, or find help through a reputable Debt Management company. Whatever plan the consumer puts together, it all has to start with a solid budget.
As you can see, a balance transfer is not always the best tool to help you manage your credit card debt. There are situations where the savings can be significant and other situations where there may be no savings at all and, in fact, may end up costing you more money. Make sure that you thoroughly read and understand any offer that you are considering to avoid any unpleasant surprises. Also, keep in mind that balance transfers are not always going to help you pay off your debt faster. If your debt is causing you problems, balance transfers will not help you become debt free.
Is your newest offer a good deal?
Click here to use Bankrate.com's credit card calculator. With this, you can enter the information for up to 5 current cards and the new card you're being offered and see when your debt will be paid off if you were to transfer.