When you have multiple credit cards, you are juggling debt from several different sources. There will likely be multiple payments that need to be made, all at different interest rates. However, this can get difficult, especially if some of these credit cards are at higher rates. At the same time, credit card issuers want to hold your debt because they make money from it. As a result, you will likely be inundated with offers to transfer your credit card debt. The question is whether this is a good idea for you. Here are some arguments about balance transfers on both sides of the debate.
There are valid reasons for wanting to transfer your balance. If there were not, you would not see tens of millions of people doing balance transfers every year. They can have positive short-term benefits for you. However, it is vital to use these short-term plusses as a springboard for improving your debt situation as opposed to taking advantage of it to spend more. Here are some of the positives.
Your credit cards can carry annual percentage rates of up to 30 percent. The worse your credit it, the higher your rate. You may have several different high interest rate cards. Credit card companies are willing to give you a lower rate if you move your balance to them. This can not only help save you money every month but it can also help you get a jump start on cutting down your debt since you can take some of the extra money that you save and use it to pay down your principal. In addition to a better rate, you may also be able to get better payment and credit card terms for yourself with a balance transfer,
Remember where we said that credit card companies want your debt? They want it so much that they are willing to pay you to transfer your debt to them. You can almost always find an incentive to transfer your credit card balance that makes it worth your while. The best thing for you is that many of these balance transfer cards will give you a zero percent interest rate for a certain period of time. Some of these offers can also give you a cash incentive if you spend a certain amount of money after transferring your balance.
It goes without saying that making one payment each month is easier to manage than three or more. It is easy to forget paying a bill every now and then and, with credit cards, that can bite you very hard through higher interest rates and penalties. For your administration purposes, it is more convenient to stay on top of one single payment. One due date instead of many will ensure that you are able to remain on top and current on your monthly payments.
Especially under the new FICO credit scoring system, the amount of your credit that you utilize will have a large impact on your score. If you are able to use less of your credit, you will be viewed as a more creditworthy borrower. However, you still have the same amount of debt and you just have more credit. This is where your utilization ratio goes down so it may only help you somewhat.
Balance transfers do not come free even though there are some definite benefits to it. There are a number of ways that balance transfers can either hurt your credit or hit you in the wallet. You should consider each of these factors before you decide to do a balance transfer.
Unless you are able to find a no-fee balance transfer, which is not an easy thing, you will be paying the new credit card lender money to transfer your balance over to them. This fee can be as high as five percent and is usually at least three percent. This can take away some of the benefits of transferring your debt. This is another way of charging you a fee at the outset for a balance transfer.
The main incentive for a balance transfer is that you get a zero percent interest rate for a period of time. For most balance transfer card, the zero percent period lasts for approximately 15 months. Make sure to check what the rate is after you must start paying interest rates. Many credit card issuers do not call a lot of attention to the interest that you will need to pay if you are not able to pay off your balance in 15 months. This is because the rate may be higher than you expect.
If you move over some balances and end up closing the accounts, you will lose some history of having paid back credit card loans. This will hit your credit score because one of the elements of your score is the fact that you have a track record of paying your bills. Closing accounts will result in a short term hit to your credit unless you can build a history paying off your new account. If you have a history of opening and closing accounts, it can also be a black mark on your credit rating.
When you open a new balance transfer card, as mentioned above, you may not want to close your old accounts. However, the additional credit may be a temptation for you and you can pile on even more debt. This will defeat the purpose of your balance transfer and will keep you from getting out of debt quickly. In addition, the fact that you are paying zero interest for a period may make you feel better off financially than you really are. The bills will always come due at a certain point and you may add to your debt instead of paying it off during the introductory period.