Balance transfer credit cards generally offer an introductory 0% APR offer, which means you can effectively save tons in cash by paying off the balance within the promotional period.
In contrast to letting the balance ride on your original card and accumulate interest, balance transfer holds considerable promise for those struggling with debt. However, this workaround has certain glaring drawbacks that just cannot be overlooked.
End of the Introductory APR
Even before jumping onto the balance transfer bandwagon, you must take notice of the regular ongoing APR of the new card that follows the promotional APR tenure.
Not knowing when the 0% offer ends is one of the major mistakes a person can make. If the transferred debt is not repaid in time, the remaining amount will be subject to the card’s regular APR, and the interest rates can skyrocket once the introductory offer expires.
Therefore, it pays dividends to carefully absorb the card’s terms & disclosures and make a mental note of the timeline. Even though it might require paying more than the bare minimum each month, try to pay off the balance in time to minimize excessive interest payouts.
Added Cost in Balance Transfer Fees
Like all good things in the world, balance transfers do not come for free. Balance transfer credit cards usually charge anywhere between 3% to 5% of the amount you transfer, like a balance transfer fee, with a fixed minimum of $5 to $10.
For example, transferring $10,000 with a 5% transfer fee can end up amounting to $500, which is a considerable extra cost, especially when you’re trying to save money.
Run the numbers thoroughly before jumping ship. Make sure the balance transfer fee and the new card’s annual fee don’t add up to make an overall negative bargain for you. It may also be the case that letting the balance be on the old credit card may be relatively profitable in the long run.
Hurts Your Credit Score
Just like how applying for and opening a new credit card affects your credit history, balance transfers have also been found to be detrimental to credit scores. Moreover, possessing a credit card that houses a balance above 30% of the credit limit hits your credit score the wrong way.
It is common knowledge that moving your credit card balance to a card with not enough credit can significantly negatively affect your credit score. All this matters because you need good credit to get approval for a balance transfer credit card in the first place.
Racking Up More Debt
Transferring your balance to a new credit card is an alternative way of having more credit at your disposal than before. This calls for extra discipline and restraint from making lavish purchases, as it might land you in a bigger debt trap than you found yourself in.
One of the most likely worst-case scenarios may result in you not paying off the pre-existing debt within the introductory period and just shuffling money around without actual savings.
Balance transfer usually makes sense when you find the suitable longest time frame possible for debt repayment or the smallest balance transfer fee. Once you’ve assessed the utility of the card beyond its promotional period and if the 0% APR period matches your personal circumstances, balance transfer turns into a tactical move worth making.
At Briteside Solutions, we believe that knowledge is power. To learn more about how to gain control over your finances, contact us today.