by Elizabeth Aldrich | Updated July 21, 2021 - First published on Sept. 28, 2020
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Paying off debt is easier with balance transfer offers, but they might be running out.
In times of economic uncertainty, lending becomes riskier and creditors tighten their purse strings. The current recession, announced by the National Bureau of Economic Research (NBER) just months after the COVID-19 outbreak was declared a global pandemic, is no different.
While we haven't seen massive shifts in lending yet, there have been notable changes. In particular, credit card issuers seem to be pulling back on balance transfer promotions. Some popular credit cards have dropped their balance transfer offers altogether, and many of the best balance transfer offers have shortened promotional periods. Meanwhile, standards to qualify for a balance transfer offer are rising.
If you're facing an outstanding balance on your credit card and think a balance transfer to pay off debt could help, you might not be out of luck. Here's what you need to qualify, and what to do if you don't.
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A good credit score has long been a requirement for most balance transfer credit cards, and that hasn't changed. While a FICO Score® of at least 670 is usually sufficient, as lenders tighten up, they may look for candidates with even higher scores. A score of 700 or above will put you in a better position to qualify.
Keep in mind that credit card issuers look at your entire credit history, not just your score. Two of the most important factors are a history of on-time payments and a low debt-to-credit ratio. If missed payments show up on your credit report, especially if they're recent, your odds of approval will be lower. As for your debt-to-credit ratio (that is, your overall revolving debt divided by your total available credit), keeping it under 30% is advisable.
Of course, keeping a low debt-to-credit ratio presents a tricky catch-22 to people using a balance transfer to pay off debt. If you're well above 30%, you might want to consider paying off some of your debt (if you can) or increasing your available credit before applying for a balance transfer card. To do the former, ask your credit card issuer for a credit limit increase. Ask if your request for a credit limit increase will result in a hard pull on your credit report, though, as this can ding your score temporarily.
In addition to good credit, a higher income will help your odds of approval and the credit limit you're extended. If you're worried you'll be declined due to insufficient income, paying down any existing balances can help credit card issuers feel better about lending to you, since a higher debt-to-income ratio signals more risk. You could also try getting a co-signer, but keep in mind that your co-signer will be on the hook if you default on your payments, and it could impact their credit.
To get a bigger credit limit, you can try calling the issuer once you're approved. If you already have cards open with them, they might be hesitant to extend you lots of credit on this new card, so ask if you can shift around your credit limits to make more room for a balance transfer. The higher your credit limit on a balance transfer card, the better, because you want sufficient room to transfer all the debt you plan to pay off. Snagging a credit limit that's significantly higher than the amount you plan to transfer will help you protect your credit.
Every credit card issuer, and even every credit card, has a different standard of approval. When you find the card that's right for you, research the card's qualification requirements and the issuer's application requirements.
The most important features to pay attention to in looking for the best balance transfer card are the promotional period and the balance transfer fee. These will determine whether you actually save money paying off debt this way, and how much you save.
You generally want the longest promotional period possible, as this will give you more time to pay down your balance interest-free. The goal is to pay your balance in full before this period ends. However, sometimes you have to weigh a card's promotional period against its balance transfer fee.
The vast majority of balance transfer credit cards carry a balance transfer fee, charged as a percentage of the balance transferred. The typical balance transfer fee is 3%, although some cards with longer promotional periods charge 5%. If you're lucky, you can sometimes find offers that include a $0 balance transfer fee for a limited time, but they'll typically have a shorter promotional period. Do the math to figure out which offer works best for you.
There are also some serious pitfalls in paying off debt with a balance transfer. Most importantly, if you fail to pay your balance before the promotional period ends, the regular APR is assessed on the remaining balance. The regular interest rate on these cards tends to be extremely high, so you want to avoid paying it whenever possible.
Late payments must be avoided at all costs. Not only are they bad for your credit, but most of these credit card issuers reserve the right to terminate the promotional period immediately -- and start charging the card's regular interest rate -- if you miss a payment.
Finally, be careful about paying off debt, only to rack up a new credit card balance. Doing a balance transfer can be a dangerous game, because it frees up the credit limit on your original credit card. If you then use this credit limit, you could end up with twice the debt. While keeping old credit cards open can be helpful for your credit, if you find yourself tempted to use a card, it's best to close it and remove the temptation.
Explore all your options before you apply for a balance transfer credit card. During a recession, credit card issuers tend to be more lenient toward current customers who are struggling to pay off debt. Rather than sell your debt for pennies on the dollar to debt collectors, they usually prefer to let you defer payments temporarily or set up a payment plan if it means they'll get what they're owed. If you need help paying off a balance, try calling your credit card issuer to see what they can do for you.
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