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Balance transfers can be a great way to reduce high-interest credit card debt, lower your debt-to-available credit ratio to ultimately raise your credit score and even pay off your debt once and for all.
There’s a reason 41% of Americans polled by CompareCards.com say they’ve completed a balance transfer in their lifetime.
If not done correctly, though, you risk ending up in an even worse financial situation than what you started with. Consider this:
- 40% of those who did a balance transfer did not pay off the transferred balance during the 0% or low-interest introductory period.
- More than 60% paid a balance transfer fee of 3% or higher.
These and other common balance transfer mistakes can hurt your credit score and your bottom line. By understanding these seven common balance transfer mistakes, you can avoid them on your journey to financial freedom.
The seven balance transfer mistakes include, but aren’t limited to:
- Not exploring options with your current card issuer
- Not doing enough research
- Not doing the math
- Not reading the fine print
- Not having a repayment strategy
- Racking up new debt on your paid-off or new balance transfer card
- Closing your old card
1. Not exploring options with your current card issuer
Even though 41% of Americans have used balance transfer credit card deals to cut down on high-interest card debt, that doesn’t mean it’s the only choice — or even the best choice.
Before opening a new account, call your current credit card issuer and ask for a lower interest rate. “People might be surprised at how often that’s successful, especially if you’ve got a good history with the issuer and a good track record for on-time payments,” said Matt Schulz, chief industry analyst at CompareCards.com.
You won’t bring your interest rate down to 0% with a phone call, according to Schulz, but you could shave 5-6% off your interest rate. “That’s significant savings,” he said.
2. Not doing enough research
Finding the best balance transfer credit card requires you to do some homework. You’ll want to compare balance transfer fees, the length of the introductory offer and the interest rate after the intro rate expires.
“Just because a card says it’s a 0% interest balance transfer card doesn’t mean there are no costs associated with the transfer,” Schulz explained. “Many cards come with a balance transfer fee of 3-5%.” Know that there are plenty of balance transfer cards that don’t charge a balance transfer fee, although those deals typically limit the 0% intro to 12 months.
The fee isn’t so high that it should be a deal breaker, according to Schulz, but it’s important to be aware of it and figure it into your repayment plan.
Knowing your FICO credit score can also help you choose a card you’re likely to qualify for. And getting copies of your credit report from all three major credit bureaus in order to fix any mistakes can help you qualify for better offers. You can pull a free copy of your credit report from annualcreditreport.com from each of the big three credit bureaus once a year.
3. Not doing the math
Once you know the balance transfer fee, do the math to figure out the total cost of your balance transfer. The balance transfer fee is added to the amount you transfer to your new card.
Check out our Credit Card Balance Transfer calculator for help.
For example, let’s say you want to transfer $2,000 to a 3% balance transfer fee card that is offering 0% interest for 15 months. The total amount on the balance transfer card will be $2,060. Divide that amount by 15 months, and you’ll have to pay $137.33 a month to wipe out the debt during the no-interest promotional period. Any balance left over will be subject to the regular interest rate the card issuer assigned you.
4. Not reading the fine print
Even after you understand the basics, you’ll want to make sure you’ve read all the fine print to avoid mistakes. Balance transfer cards often come with caps or maximums you can transfer that are lower than your actual credit limit. “It’s important to understand you may not be able to transfer the entire balance from your old card to your new card,” Schulz said.
There may also be deadlines tied to the low promotional rates. “If you wait too long to transfer a balance, you could miss your opportunity to get the promotional rate,” Schulz warned. “That’s something to keep in mind as you make a plan to tackle your credit card debt.”
Some cards have a 60-day deadline to transfer a balance after approval, but you might have as few as 30 days or as long as four months to transfer your balance.
The best way to avoid missing that deadline is to transfer the balance right away, either when applying for the new card or as soon as you receive and activate your new card.
Remember to continue making payments on your old card until you see the balance transfer has processed.
5. Not having a repayment strategy
Once you’ve made your balance transfer successfully, it’s time to get into the mindset of paying off that debt. First, create a plan.
“Anybody trying to attack their credit card debt needs a budget,” Schulz said.
Once you track your monthly income and expenses, you can calculate how much money you have available to pay off your balance transfer card — if it will be enough or if you need to cut expenses or increase your income in some way.
“Once you know how much you’re spending and how much you’re bringing in, you can figure out how to free up some extra money to put toward the balance you transferred,” Schulz said.
Otherwise, when that interest rate skyrockets after the promotional period expires, you could find yourself right back to where you were before you applied for the balance transfer card.
6. Racking up new debt on the old or new card
A balance transfer credit card is a good way to reduce or eliminate high interest charges, but it’s not a “get out of debt free” card, so to speak. It takes discipline to pay down an existing card and not charge it up again.
Some balance transfer cards also offer a 0% APR on new purchases, which can lead to temptation. “As obvious as this may sound, the most important thing is not to see the new credit card as an excuse to go spend,” Schulz said. “You’re just shooting yourself in the foot.”
Similarly, you may look at your zero balance or low balance on your old card and starting using it again. Using your old card defeat your efforts to get out of debt once and for all.
7. Closing your old card
While you shouldn’t start racking up new debt on your old card, you shouldn’t close it either, unless it has a sky-high annual fee. Closing the card will shorten your length of credit history, a factor that impacts 15% of your credit score. Also, closing the card will increase your overall credit utilization ratio (the amount of debt you carry relative to the total credit limit amount), which accounts for 30% of your credit score. It’s best then to leave it open and keep it active by putting a small charge on it every month and paying off the balance in full when the bill comes due.
When you apply for the new balance transfer credit card, your credit score will take a temporary hit due to the hard credit pull and the new account opening.
Ultimately, a zero balance — or even a lower balance — on your old card, along with a new credit line, will improve your credit utilization ratio.
If you manage to avoid these seven balance transfer mistakes, a balance transfer credit card can substantially reduce the amount of interest you’re paying. If you devise a repayment strategy to eliminate the debt before a 0% interest deal expires, it can help you get out of debt faster because more of your money will go toward the principal, rather than interest.