3 facts to consider before making a balance transfer
A balance transfer is a process through which a person who is carrying a balance on their credit card can transfer that balance to another institution. Typically, this gets you a lengthy low-APR period that allows you some temporary financial breathing room. Like anything in life, though, balance transfers have their downsides; there are some things you should know before you sign up for one.
Transfer Fees Can Upset Your Plans
A balance transfer fee is a levy that the bank charges on the balance you’re asking them to assume—it’s how they make money off these offers, aside from future interest payments. Not all balance transfer offers charge one, but many do, with some ranging as high as 5% of your balance.
If the card you’re looking to switch over to has any kind of balance fee, run a few cost-benefit calculations before you commit to anything. How long is the low-APR period the new card is offering, and how much would you be paying in interest over the same length of time if you chose to stick to your old card? Can you take the money you’ve saved by choosing to transfer and apply it to the balance instead, and will it make any significant difference to the interest you’ll have to pay later? Once you have an idea of what you stand to gain, compare it to what the transfer fee is going to cost you to see if making the transfer still makes sense. If the savings are too low or the fees are too high, don’t proceed.
You May Lose Access To The Grace Period On New Purchases
The grace period (in the context of credit cards) is the amount of time during which a balance incurred during a new purchase made on credit is considered interest-free. This is a very important concept, as it’s what makes it possible for people starting with nothing to build up their credit score without having to pay for the privilege of doing so. It’s so ingrained in the common conception of what a credit card is and does that many take it for granted, but credit companies do sometimes take it away. It’s very common to do this for new customers who switched over by making a balance transfer (after all, you already had that balance before— technically speaking, it isn’t new). You may not even be aware that this has happened until your monthly statement comes in.
To avoid being taken by surprise, read the fine print carefully before you make a balance transfer, and be sure to check your first statement carefully to make sure everything is as you expected it to be. The earlier you know about your nullified grace period, the sooner you’ll know to factor interest charges into the purchase price of anything you buy with your credit card.
It’s a Short-Term Measure, Not a Long-Term Strategy
Balance transfers are an easy way to put off payments on large debts, and they can be lifesavers when you’re in a tough spot financially. However, because they make it so much easier to live with those debts without having them impact your lifestyle very much, transfers can quickly become an unhealthy financial crutch. While it’s possible to keep a long chain of balance transfers going as you hop from institution to institution (some people even add new purchases to their balance as they do this!), never actually paying your debt down will catch up with you in the long run.
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