Despite the cost of borrowing for those who already possess swollen balances, many lenders are offering an introductory rate of 0% on new credit cards, so it may be possible to pay off your debt more quickly and efficiently than you thought.
Balance transfer credit cards allow borrowers to move debt from an old account at their normal high rate of interest to a new account, usually with a different company, which charges a much-lower rate. Although it seems like a no-brainer to take the lower rate, there are factors to consider before transferring your debt from one card to another.
Your credit habits are the biggest factor in determining whether a balance transfer is a great tool for bringing down your debt or a will-o-the wisp that will lead you into a swamp of further debt and possible bankruptcy.
Look at your credit-spending habits over the past year or two. Has your debt been growing in that amount of time? Are you using your credit cards regularly, or have you been working to get your borrowing down? If your debt has grown, the chances are that a lower rate will just encourage more spending, taking you further into debt and defeating all your good intentions.
How fast will you pay off the debt, and do you always make your payments on time? Most cards put a time limit on the introductory rate. Calculate how long it will take you to pay down the balance, and look for a card with an introductory period that will allow you to pay as much of the total as possible.
Keep in mind that one late payment can mean an immediate increase. The shiny introductory rate of 0% can zoom up to 28% overnight, wiping out all the savings you hoped to obtain. Be realistic about your self-discipline when it comes to using credit.
If a balance transfer fits with your financial goals and you have the self-discipline to make it a wise decision, consider the impact a transfer can have on your credit. Your debt-to-credit ratio is an important part of how your score is calculated. If you have a balance of half your credit limit, your debt-to-credit ratio is 50%.
If you take out a new card with the same credit limit, and transfer your debt without closing the original account, your debt-to-credit ratio drops to 25%. Your score will take a small, temporary ding from opening a new account, so it may be worthwhile to keep the original account open to balance the effect on your score – as long as you’re certain you can maintain the self-discipline to not run up more debt on the old card.
Always remember that balance transfer credit cards can be a useful tool in managing your debt, but they should be handled with care in order for you to gain the maximum benefit a low-interest card can offer.