Don't make a decision you'll regret because you didn't think it through.
A balance transfer is a simple financial transaction that involves moving the balance on a credit card over to a different card.
Usually, you'll do a balance transfer because the new card offers a reduced interest rate. For example, a number of credit cards will offer a 0% introductory promotional rate on transferred balances.
While it can make a lot of sense to move a credit card balance to a card offering a lower rate, there are four key questions you need to ask yourself before you move forward.
1. What are my goals?
If you're doing a balance transfer to pay off debt, you want to make sure you're actually making real progress on paying off that debt. The last thing you want to do is simply move your credit card debt around. That's why you should do a balance transfer only if you have a plan to pay your debt off ASAP.
You also need to consider the possible risk you're taking if you transfer a balance without having a plan in place. See, when you've transferred your balance, you've freed up the credit on that first card. Charging up a new balance on your old card could leave you with even more debt to pay off.
So before you move forward, make sure you won't be tempted to make your financial situation worse. And if you're serious about freeing yourself of debt, it's a good idea to have a smart budgeting method in place before you do a balance transfer.
2. What is the fee?
Credit card companies often charge you to transfer a balance. It's actually pretty common to pay a fee of around 3% to 4% of the total amount you transfer.
Paying a fee doesn't necessarily mean that you won't save money, though. If your credit card interest is 17% and you pay a 3% fee to transfer your balance to a card charging 0% interest for a year, you're a lot better off paying the 3% one time than the 17% interest over the course of the year.
But you do need to take this fee into account when estimating how much a balance transfer will save you. And it pays to shop around for the best balance transfer card so you can find the lowest fees possible.
3. What's the transfer limit?
You can't move an unlimited amount of money to a balance transfer card. Most cards cap the amount you can transfer at a few thousand dollars. And the balance transfer fee generally gets added to the card balance as well, reducing your available credit by a little bit.
It may still make sense to transfer some of your credit card debt even if you can't move all of it over. But be aware this will mean making the monthly payment on your balance transfer card and your existing card at the same time. Make sure this fits within your budget.
4. Am I able to pay off the balance before the promotional rate expires?
The introductory 0% rate on a balance transfer card typically lasts between 12 and 15 months. After that, the card's standard rate applies.
Ideally, you'd be able to repay the entire transferred balance before the 0% rate ends. For example, if you move over $5,000 in credit card debt and want to pay it off in 12 months, that would mean making a monthly payment of about $417 per month.
If you don't think you can pay off the full balance before the 0% rate ends, consider the interest you'll owe once the promotional rate is over. If it's higher than the rate on your current card, your balance transfer may not save you money, especially if you end up having to pay off a high amount when the promotional period ends. It could potentially cost you more money.
While you may assume that you can just do another balance transfer when the promotional rate expires, that's not always the case. You may not necessarily get approved, or a good card offer may not be available. Be aware of this risk before you decide that a balance transfer is right for you.
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