8 tips on using balance transfer cards to get out of debt
Balance transfer cards can be a powerful tool for those climbing out of debt. They do, however, come with pitfalls you must avoid.
This post comes from Rob Berger at partner site the Dough Roller.
Balance transfer credit cards can be a cost effective way to tackle your debt. For a relatively low fee, you can transfer high interest debt to a 0 percent card for as long as 18 months. They are not, however, without pitfalls.
To help you avoid those pitfalls, here are eight tips for managing balance transfer cards.
For 0 percent interest on purchases, the credit card issuer won’t charge interest on purchases you make with the card. You’ll still have to pay a minimum payment each month, but it won’t include any interest charges. These interest free deals on purchases typically last from six to 18 months. Once the introductory rate expires, you’ll be paying the regular APR on any remaining debt on the card.
Zero percent on balance transfers is different. With these deals you can transfer debt – typically from another high interest credit card, though not necessarily – onto a new card that offers 0 percent interest on balance transfers. As you’ll see below, 0 percent balance transfer cards typically charge a transfer fee, while there are no fees with 0 percent on purchases.
But that’s not going to help if you then start charging up more debt. A balance transfer won't do you any good if you go back to that old card and start charging it up again. The key is to avoid new debt. It’s absolutely critical or this process is going to end up putting you deeper in the hole.
Some simply roll the debt over from one 0% balance transfer card to another until their debt is paid off. That can be a good plan if that option is available to you. But it usually requires a pretty good credit score.
Again, you may be able to transfer that debt over to yet another zero-interest card, but it’s still important for you to understand the worst case scenario. If you can’t transfer that debt again, what kind of interest rate will you be paying? Factor that into your decision as to whether a balance transfer option is right for you in the first place.
As a result, when you do a transfer your total debt will go up by the amount of the transfer fee. The transfer is probably still worth the cost because you may be paying 10 percent, 15 percent, or even 20 percent in interest on your credit card debt. To get it transferred to a 0 percent interest card for a 3 percent fee is still a really good deal.
Having looked at that data extensively, I can tell you that generally for the best 0 percent balance transfer deals, you’re looking at credit scores in the low 700s as an average for what gets approved. When you look at the lowest approved scores, you do see approvals for scores in the 600s. Credit scoring is just one factor that a credit card company considers in making its decision. But it’s an important one. If you don’t know your score, here are some ways to get your credit score for free.
Also, when you apply for a credit card, the company will pull your credit score, which counts as a credit inquiry. Credit inquiries can lower your credit score. In addition, it's not uncommon to max out the balance transfer card as you move as much debt as possible to the new 0 percent offer. This high credit utilization can lower your score, too.
As a result, you may want to think twice before using a balance transfer if you are about to buy or refinance a house. You may not want to take a risk that a lower score might raise the rate on your home loan.
Balance transfer cards can be a good way to get out of debt more quickly, but you need to make sure you understand them and use them responsibly.
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