Charles H. Miller
A credit card made for balance transfers can be a great tool to help people get out of debt, or at very least put their credit card debt under control. If used responsibly, these sort of financial products can get one’s finances back in order.
But — there’s always some “but” — balance transfer cards do have their flaws and it is important to know them before signing-up for one. So here are 5 potential dangers of these products so you know what you’re getting into…
1. The transferred balance can be credited first
Credit card issuers can allocate the minimum required payment in any way they want. So if you make new purchases with your freshly issued balance transfer card — and have previously moved balance from some other card(s) — the credit card company can apply a portion of the money toward the high rate purchase or to the low rate balance transfer. In some cases, the issuer may apply only the minimum to the 0% balance (during the introductory period when you have that rate), and then apply what’s left to the high rate purchase balance. This in turn keeps the high rate balance on the account longer, earning the card issuer more interest.
To prevent this, make sure to use a balance transfer card for what its best used — to get out of debt and not to fund additional purchases.
Also, before applying for a balance transfer card, make sure it offers an introductory period of 0% APR on both balance transfers and purchases, just in case you need to use that card to buy something.
2. Post-introductory APRs can be higher than expected
It is estimated that about a third of balance transfer card consumers don’t pay off their balances within the introductory period (when APR is 0%). And when that period ends, an APR as high as 25% kicks in, making debt repayment that much harder.
This is the subject of numerous horror stories you may have found on the internet; people couldn’t clear their debts off during the introductory period and were after forced to deal with a large debt.
In that sense, we advise our readers to do their best to make regular payments their balance transfer cards. You should pay as much as you can every month.
3. Balance transfer fees could eat up the savings
Most credit cards come with a balance transfer fee ranging from 3 to 5 percent. Some especially good cards — as in, especially good for balance transfers — don’t have this fee. So if your goal is to get out of debt as soon as possible, the balance transfer fee should be the second most important number to look at; the first being the number of month of 0% APR.
In some cases, you may have to go for the card that includes a balance transfer fee — it could offer more months of introductory APR of 0% — and then you will have to do the math. Does it still work for you to move balance from existing card(s) to the new one? Those extra 3 to 5 percent could be deal breaker, but they don’t have to be.
4. Be careful with rewards
In addition to offering APR of 0% for a limited amount of time, some cards will also reward your purchases with points or cash-back. You should be careful with those, cause they could prompt you to spend more. We suggest getting a separate credit card for purchases, and taking your time to benefit the most. Also, in order to get anything out of credit card rewards, you should be paying off your balance at the end of every month. (Related: The Best Credit Card Rewards Strategy: Take Some Time)
To put it in other words, the idea of using a balance transfer card is to clear your debt, not get more of it.
5. Your credit score could be affected
Every time you sign-up for a new credit card, your credit score gets affected. First, it requires the hard credit inquiry; and second – because you’re opening a new account, you also lower the average age of your credit profile.
Like that’s not enough, after that balance transfer has been completed, you’ll end up with a new card that has a high credit utilization ratio. And let’s not go into the effect that closing of an old account has on your score. (Related: 5 Factors With The Biggest Impact on Your Credit Score)
As you can see, getting a balance transfer card has multiple — mostly bad — effects on your credit score, but there’s also the other side of the coin. Presuming you manage to pay off your balances every month, your credit score will steadily be regaining points and more importantly – help you get out of debt. And that, we think, is the whole point of the balance transfer game. If you know how to play it and can discipline yourself, you can win big at the end. So go for it!
