5 Reasons Balance Transfers Can Do More Harm Than Good

Balance transfers are excellent opportunities to move high interest balances to a low or no interest credit card.  More of your payment will go to the principal balance owed and less to interest, which helps you pay it off faster.  Unfortunately, if you’re not extremely careful of the small print details, your balance transfer could actually do more financial harm than good.  Here are 5 things you’ll want to take a closer look at before moving your balances from one card to another – if you don’t, your transfer could do more harm than good!

1)You forgot to look at what the interest rate will be on the remaining transferred balance once the balance transfer promotional period ends.  A typical balance transfer offer lasts  between six months and a year, with any unpaid balances from the transfer receiving a much higher interest rate once the promotion ends.  If you’re unable to pay off the transferred balance within the promotional period – what interest will you be charged on the remaining balance?  Is it higher than what you’re currently paying?  You’ll have to figure out whether or not you can pay off a large enough portion of your balance during the promotional period to make a higher interest rate worth it once the promotion ends.

2)You forgot to consider the balance transfer fee.  Even if you’re moving your high interest balance to a zero interest card, many transfers result in a transfer fee.  A typical transfer fee might run 3-4% of the balance, with a cap of $25 or $50.  The problem is when a credit card does not set a maximum transfer fee – so if you transfer $7,000 with a 3% balance transfer fee you end up paying $210 just to move the balance!

3)You made a payment three days late.  Low or no interest balance transfer offers don’t give you any room for errors.  If you make even just one payment a couple days late, chances are you will lose your balance transfer offer and the interest rate will increase to the rate you would have received at the end of the promotion.  If this happens, you’ve probably paid the balance transfer fee to move the money to the new card, and now you very well could be paying higher interest than you were BEFORE you moved the balance!  If you’re going to move a balance from one card to another, you cannot make a late payment.  If you make more than one late payment, you could see your interest rates climbing to 30% in which case the balance transfer has done nothing but cost you money.

4)You didn’t consider your realistic possibility of being approved for the promotional offer.  If you sign up for a card offering 0% interest on balance transfers, it doesn’t necessarily mean you’ll be approved for it.  The problem is, if you sign up and fill out your balance transfer information on the application and don’t get approved – most card companies will open a new credit card and transfer the balance under different (higher) interest rate terms.

5)You didn’t pay attention to what the no or low interest offer covers.  Most cards with a 0% (or low interest) balance transfer offer only give you the promotional rate on the balances you transfer from another card.  If you make purchases using your new credit card, they’re almost always charged at the higher interest rate.  Many credit card companies apply your payments to the low or no interest balances first, meaning the entire time you’re paying off your transferred balance, any new purchases are accumulating interest fees.

Related Posts:

• Considering a Balance Transfer? Here’s What to Know - Much of the nation is really following the advice of financial experts and are working hard at paying down their debts. Along...
• Best Balance Transfer Card Strategy - You can still find balance transfer cards among other rewards type of credit cards being offered to consumers.  The restrictions are tighter...
• Four Different Balance Computation Methods to Understand - There are a lot of different things that you are going to want to take into consideration before you make a balance...
• Balance Chasing – Is it Happening to You? - Credit card companies have changed the rules in the middle of the game recently by increasing fees and interest rates.  But, they...

This entry was posted on Sunday, December 28th, 2008 at 12:21 pm and is filed under Debt & Consolidation, Tips & Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.